• A credit rating is a quantified assessment of the 

creditworthiness of a borrower 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,
corporation, state or provincial authority, or sovereign government.

• Individual credit is scored from by credit bureaus such as Experian and TransUnion on a
three-digit numerical scale using a form of Fair Isaac (FICO) credit scoring.

• Credit assessment and evaluation for companies and governments is generally done by a
credit rating agency such as Standard & Poor‘s (S&P), Moody's, or Fitch.

• These rating agencies are paid by the entity that is seeking a credit rating for itself or for
one of its debt issues.
 Importance of Credit Rating
For The Money Lenders

• Better Investment Decision: No bank or money lender companies would like

to give money to a risky customer. With credit rating, they get an idea about
the credit worthiness of an individual or company (who is borrowing the
money) and the risk factor attached with them. By evaluating this, they can
make a better investment decision.

• Safety Assured: High credit rating means an assurance about the safety of the
money and that it will be paid back with interest on time.
For Borrowers

• Easy Loan Approval: With high credit rating, you will be seen as low/no
risk customer. Therefore, banks will approve your loan application easily.

• Considerate Rate of Interest: You must be aware of the fact every bank
offers loan at 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 will the rate of interest.
 TYPES OF CREDIT RATING
• Sovereign credit ratings

A sovereign credit rating is the credit rating of a sovereign entity, such as a national government. The
sovereign credit rating indicates the risk level of the investing environment of a country and is used by
investors when looking to invest in particular jurisdictions, and also takes into account political risk.

• Short- and long-term ratings

A rating expresses the likelihood that the rated party will go into default within a given time horizon. In
general, a time horizon of one year or under is considered short term, and anything above that is
considered long term. In the past institutional investors preferred to consider long-term ratings.
Nowadays, short-term ratings are commonly used.
• Corporate credit ratings
Credit ratings can address a corporation's financial instruments i.e. debt security such as a bond, but also the
corporations itself. Ratings are assigned by credit rating agencies, the largest of which are Standard &
Poor's, Moody's and Fitch Ratings. They use letter designations such as A, B, C. Higher grades are intended to
represent a lower probability of default. Agencies do not attach a hard number of probability of default to
each grade, preferring descriptive definitions such as: "the obligor's capacity to meet its financial commitment
on the obligation is extremely strong," or "less vulnerable to non-payment than other speculative issues ..."
(Standard and Poor's' definition of an AAA-rated and a BB-rated bond respectively). However, some studies
have estimated the average risk and reward of bonds by rating. One study by Moody's claimed that over a "5-
year time horizon" bonds it gave its highest rating (Aaa) to had a "cumulative default rate" of 0.18%, the next
highest (Aa2) 0.28%, the next (Baa2) 2.11%, 8.82% for the next (Ba2), and 31.24% for the lowest it studied
(B2). (See "Default rate" in "Estimated spreads and default rates by rating grade" table to right.) Over a longer
period, it stated "the order is by and large, but not exactly, preserved".
Long-term Short-term Long-term Short-term Long-term Short-term Rating description
Aaa AAA AAA Prime
Aa1 AA+ AA+
A-1+ F1+
Aa2 AA AA High grade
P-1
Aa3 AA− AA−
A1 A+ A+
A-1 F1
A2 A A Upper medium grade
A3 A− A−
P-2 F2
Baa1 BBB+ A-2 BBB+
Baa2 BBB BBB Lower medium grade
P-3 F3
Baa3 BBB− A-3 BBB−
Ba1 BB+ BB+
Non-investment grade
Ba2 BB BB speculative
Ba3 BB− BB−
B B
B1 B+ B+
B2 B B Highly speculative
B3 B− B−
Caa1 CCC+ CCC+
Caa2 Not Prime CCC CCC Substantial risks
Caa3 CCC− CCC−
C C
CC CC Extremely speculative
Ca
C C Default imminent
C RD RD
/ SD D D D In default
/ D
 CAMELS Rating System
• CAMELS is a recognized international rating system that bank supervisory
authorities use in order to rate financial institutions according to six
factors represented by its acronym. Supervisory authorities assign each
bank a score on a scale.

• A rating of one is considered the best, and a rating of five is considered

the worst for each factor.

• The CAMELS acronym stands for "Capital adequacy, Asset quality,

Management, Earnings, Liquidity, and Sensitivity."
 Capital Adequacy
• Examiners assess institutions' capital adequacy through capital trend analysis.
Examiners also check if institutions comply with regulations pertaining to risk-
based net worth requirements.

• To get a high capital adequacy rating, institutions must also comply with interest
and dividend rules and practices.

• Other factors involved in rating and assessing an institution's capital adequacy are
its growth plans, economic environment, ability to control risk, and loan and
investment concentrations.
 Asset Quality
• Asset quality covers an institutional loan's quality, which reflects the earnings of the
institution.

• Assessing asset quality involves rating investment risk factors the bank may face and

balance those factors against the bank's capital earnings.

• This shows the stability of the bank when faced with particular risks. Examiners also check
how companies are affected by the fair market value of investments when mirrored with
the bank's book value of investments.

• Lastly, asset quality is reflected by the efficiency of an institution's investment policies and
practices.
 Management
• Management assessment determines whether an institution is able to
properly react to financial stress.

• This component rating is reflected by the management's capability to point

out, measure, look after and control risks of the institution's daily activities.

• It covers management's ability to ensure the safe operation of the

institution as they comply with the necessary and applicable internal and
external regulations.
 Earnings
• A bank's ability to produce earnings to be able to sustain its activities,
expand, remain competitive are a key factor in rating its continued
viability.

• Examiners determine this by assessing the bank's earnings, earnings'

growth, stability, valuation allowances, net margins, net worth level,
and the quality of the bank's existing assets.
 Liquidity

• To assess a bank's liquidity, examiners look at interest rate risk

sensitivity, availability of assets that can easily be converted to cash,
dependence on short-term volatile financial resources and ALM
technical competence.
 Sensitivity
• Sensitivity covers how particular risk exposures can affect institutions. Examiners assess
an institution's sensitivity to market risk by monitoring the management of credit
concentrations.

• In this way, examiners are able to see how lending to specific industries affects an
institution.

• These loans include agricultural lending, medical lending, credit card lending, and energy
sector lending.

• Exposure to foreign exchange, commodities, equities, and derivatives are also included in

rating the sensitivity of a company to market risk.
 Credit Rating Agencies in India

CRISIL
• Credit Rating Information Services of India Limited is the first credit rating agency of the country
which was established in 1987. It calculates the credit worthiness of companies based on their
strengths, market share, market reputation and board. It also rates companies, banks and
organizations, helping investors make a better decision before investing in companies’ bonds. It
offers 8 types of credit rating which are as follows:

• AAA, AA, A – Good Credit Rating

• BBB, BB – Average Credit Rating

• B, C, D – Low Credit Rating

ICRA
• Investment Information and Credit Rating Agency of India was formed in 1991 and is headquartered in Mumbai. It offers
comprehensive ratings to corporates via a transparent rating system. Its rating system includes symbols which vary with
the financial instruments. Here are the types of credit ratings offered by ICRA:

• Bank Loan Credit Rating

• Corporate Debt Rating

• Corporate Governance Rating

• Financial Sector Rating

• Issuer Rating

• Infrastructure Sector Rating

• Insurance Sector Rating

• Mutual Fund Rating

CARE

• Credit Analysis and Research Limited (CARE) offers a range of credit rating services in
areas like debt, bank loan, corporate governance, recovery, financial sector and more. Its
rating scale includes two categories – long term debt instruments and short term debt
ratings.

ONICRA

• Onida Individual Credit Rating Agency of India established in 1993 which offers credit
assessment and credit scoring services to both individuals and businesses. Along with this,
it also offers risk assessment reports to individuals, small and medium businesses and
corporates. Its ratings are based on two factors – Financial Strength and Performance
Capability.
SMERA
• Small Medium Enterprises Rating Agency Of India Limited has two divisions – SME Ratings and Bond Ratings. It was

established in 2011 and is a hub of financial professionals. It offers credit ratings in the following format:

• AAA, AA, A – Low Credit Risk

• BBB, BB – Moderate Credit Risk

• B, C – High Credit Risk

• D- Defaulted

Brickwork Ratings India Private Limited

• Headquartered in Bangalore, this credit rating agency is responsible to rate bank loans, municipal corporation, capital

market instrument and SMEs. Other than this, it is also responsible to grade real estate investments, hospitals, NGOs,

MFI, etc. It offers various rating system depending upon the different financial instrument.