Know More About Credit Rating

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 Credit rating is a numerical representation of the creditworthiness of an individual or a business. The credit rating is a key aspect that makes or breaks a loan application. The credit rating/score acts as an indicator stating if the borrower has defaulted on loan payments before and if he is worth trusting with the new loan.

There are several credit rating agencies in India, such as CRISIL Ltd, India Ratings and Research Pvt Ltd, ICRA Limited, CARE, Brickwork Ratings India Pvt Ltd, SMERA Ratings Limited, and Infometrics Valuation and Rating Pvt Ltd.

Know more about credit rating and credit rating agencies here.

What does credit rating mean?

A credit score is a 3-digit number that represents the creditworthiness of the borrower. Credit rating is the analysis of the possible credit risks associated with granting a financial instrument to an individual or a company. Based on the credit score, a lender determines whether the borrower can repay the loan amount or not.

The rating is provided based on the creditworthiness and the credentials of an individual or a company. The creditworthiness of an individual or a company is decided based on the lending and borrowing transactions done in the past. Credit rating is determined after weighing the statements of liabilities and assets, and their ability to meet the debt obligations.

It is recommended that you maintain a good credit rating if you would like to apply for a huge loan in the future.

You can maintain a good score given that you pay all your existing debts on time, check your credit report once in a while to stay informed of your score and keep your credit utilisation ratio below 30%.

The credit score is determined based on the following factors.

• Payment History: 35%
• Credit Utilisation: 30%
• Credit History Duration: 15%
• Credit Mix: 10%
• New Credit: 10%

What is a credit rating agency?

A credit rating agency (CRA) evaluates and assesses an individual’s or a company’s creditworthiness. That is, these agencies consider a debtor’s income and credit lines to analyse the debtor’s ability to repay the debt or if there is any credit risk associated.

Securities and Exchange Board of India (SEBI) reserves the right to authorise and regulate credit rating agencies according to SEBI Regulations, 1999 of the SEBI Act, 1992.

How do credit rating agencies work?

Credit rating agencies analyse an organisation, individual, or entity and assign ratings to it. These agencies have the authority to rate companies, state governments, non-profit organisations, countries, securities, local government bodies, and special purpose entities.

Many factors are considered while settling with a rating such as financial statements, type of debt, lending and borrowing history, repayment capability, past credit repayment behaviour, and more. Each of these factors contributes to a specified share in computing the end result, credit score.

The credit rating agency does not provide any decision to financial institutions on whether an entity should get a credit facility or not; rather it provides the report and additional inputs making it easier for the lender to analyse and an informed decision.

List of registered credit rating agencies

According to SEBI, the following credit rating agencies are registered and authorised to compute and share credit score/report with the financial institutions and applicants.

• CRISIL Limited: Credit Rating Information Services of India Limited (CRISIL), one of the oldest credit rating agencies, was set up in 1987. The agency stepped on to infrastructure rating in 2016. CRISIL has been operational in countries such as the USA, UK, Poland, Hong Kong, China, and Argentina in addition to India. The registered address and contact details of CRISIL are:
  CRISIL Limited
  CRISIL House Central Avenue
  Hiranandani Business Park
  Powai Mumbai 400 076
  Tel: +91 (22) 33423000
  Fax: +91 (22) 33423810
  Email: info@crisil.com
• India Ratings and Research Pvt Ltd: India Ratings and Research, a wholly-owned subsidiary of Fitch Group, provides accurate and timely credit opinions on the country’s credit market. The firm covers corporate issuers, financial institutions, managed funds, urban local bodies, project finance companies, and structured finance companies. The headquarters is in Mumbai and the other branch offices are in Ahmedabad, Delhi, Chennai, Bengaluru, Hyderabad, Pune, and Kolkata. The registered address and contact details with SEBI are:
  Wockhardt Towers, 4th Floor, West Wing
  Bandra Kurla Complex, Bandra
  East Mumbai 400 051
  Tel: +91 (022) 40001700
  Fax: +91 (022) 40001701
  Email: investor.services@indiaratings.co.in
  Website: www.indiaratings.co.in
• ICRA Limited: The Investment Information and Credit Rating Agency (ICRA), a joint venture of Moody’s and Indian Financial and Banking Service Organisation was established in 1991. The organisation is known for assigning corporate governance rating, performance rating, mutual funds ranking, and more.The registered address and contact details of ICRA are given below:
  1105, Kailash Building, 11th Floor
  26, Kasturba Gandhi Marg New Delhi 110 001
  Tel: + 91 (11) 23357940 – 50
  Fax: + 91 (11) 23357014
  Website: www.icra.in
  Email:info@icraindia.com
• CARE: Credit Analysis and Research Limited (CARE) is a credit rating agency that is operational since April 1993. The agency provides a credit rating that helps corporates to raise funds for their investment requirements. Investors can make decisions based on credit risk and risk-return expectations. In addition to the head office in Mumbai, the firm has regional offices in New Delhi, Pune, Kolkata, Chandigarh, Jaipur, Ahmedabad, Bengaluru, Chennai, Coimbatore, and Hyderabad. The address of CARE’s registered office is given below:
  4th Floor, Godrej Coliseum
  Somaiya Hospital Road
  Behind Everard Nagar
  Off Eastern Express Highway,
  Sion (E) Mumbai 400 022
  Tel: + 91 (22) 566 02871/72/73
  Fax: + 91 (22) 566 02876
  Email: care@careratings.com
• Brickwork Ratings India Pvt Ltd: In addition to registering with SEBI, Brickwork Ratings (BWR) is accredited by RBI and empanelled by NSIC, NCD, MSME ratings and grading services. It has received accreditation from NABARD for MFI and NGO grading. Brickwork is also authorised to grade companies seeking credit facilities from IREDA, Renewable Energy Service Providing Companies (RESCOs) and System Integrators (SIs). Canara Bank was the leading promoter and strategic planner for Brickwork. The registered office address of Brickwork is:
  3rd Floor, Raj Alkaa Park
  29/3 & 32/2, Kalena Agrahara
  Bannerghatta Road, Bangalore – 560 076
  Tel: +91 (80) 4040 9940
  Fax: +91 (80) 4040 9941
  Website: www.brickworkratings.com
  Email: info@brickworkratings.com
• SMERA Ratings Limited: SMERA analyses and establishes the credibility of existing micro, small, and medium enterprises (MSMEs). MSMEs can improve, grow, and avail cheaper/faster loans. The registered address SMERA Ratings is:
  Unit No.102, 1st Floor,
  Sumer Plaza Marol Maroshi Road,
  Marol Andheri (East), Mumbai 400 059
  Tel: +91 (22) 67141144/45
  Fax: +91 (22) 67141142
  Website: www.smera.in
• Infometrics Valuation and Rating Pvt Ltd: This SEBI-registered, RBI-accredited credit rating agency was founded by finance professionals, former bankers, and administrative services personnel. It evaluates entities such as banks, non-banking financial companies, large corporates, and small and medium scale units (SMUs). The rating agency is registered with SEBI under the following address:
  Flat No. 104/108, 1st Floor Golf Apartments
  Sujan Singh Park, New Delhi 110003
  Tel:+ 91 (11) 24601142, 24611910, 24649428
  Fax: +91 (11) 24627549
  E-mail: vma@infomerics.com
  Website: www.infomerics.com

Frequently Asked Questions

Can I use the terms ‘credit score’ and ‘credit rating’ interchangeably?

Generally, the term ‘credit rating’ is used when you are referring to the score associated with businesses. You must know that a business looking for credit will be assessed based on its track record and financial status to coin a credit rating for the business. The term ‘credit score’ is used when referring to individuals. However, in daily practice, the two terms are used interchangeably.

Why is a credit score important?

A credit score is important for borrowers, irrespective of being individuals or businesses because the credit rating agencies consider the borrower’s financial position in an objective way to recommend whether they are trustable with a new line of credit. Lenders consult the credit reports issued by such agencies to approve or reject loan applications.

A poor credit score can make it difficult for a person to avail of a loan anywhere in the country. Even if they get a loan, the terms may be stringent and the interest rate may be high. On the other hand, a good credit score can get a quick loan approval along with other perks, such as an overdraft facility, lower interest rates, lower margin, among other things.

What does your credit score convey to the lender?

The lender analyses your credit score and credit report to understand if you have defaulted on your loans before, the types of loans you have availed, how well you have balanced your finances, and so on. Basically, the credit score conveys whether you can repay the new loan in a timely manner if granted.