Credit Ratings and the Credit Rating Agencies

Credit

Credit Rating evaluates the credit worthiness of debt instruments, companies, governments, local bodies, etc. based on a robust and clearly articulated analytical framework. Credit rating agencies evaluate the debtor’s ability to pay back the debt and the likelihood of default. These agencies evaluate the qualitative and quantitative information for a company or government. The analysts of these credit rating agencies have an access to the non-public information of companies. The largest credit rating agencies which tend to operate worldwide are Moody’s, Fitch, Standard and Poor’s, Dun and Bradstreet. In India, CRISIL is the largest and most influential credit rating agency.

Ratings are based on experience and judgment rather than mathematical formulae. Credit ratings are used by individuals and other entities for deciding whether the company will pay its debt obligations or not. A poor credit rating indicates that there is a very high risk of defaulting.

CRISIL (Credit Rating and Information Services of India Ltd.) covers more than 45,000 entities in India including over 30,000 SMEs. It is the undisputed leader in the field of ratings, research, risk advisory, etc. Standard and Poor’s has the majority of stake in CRISIL. Some of the debt obligations rated by CRISIL are:-

  • Non-convertible debentures/bonds/preference shares
  • Commercial papers/certificates of deposits/short-term debt
  • Fixed deposits
  • Loans
  • Structured debt

Apart from the debt obligations, the entities which are rated by CRISIL include:-

  • Industrial companies
  • Banks
  • Non-banking financial companies (NBFCs)
  • Infrastructure entities
  • Microfinance institutions
  • Insurance companies
  • Mutual funds
  • State governments
  • Urban local bodies

According to CRISIL, their credit ratings are

  • An opinion on probability of default on the rated obligation
  • Forward looking
  • Specific to the obligation being rated

But they are not

  • A comment on the issuer’s general performance
  • An indication of the potential price of the issuers’ bonds or equity shares
  • Indicative of the suitability of the issue to the investor
  • A recommendation to buy/sell/hold a particular security
  • A statutory or non-statutory audit of the issuer
  • An opinion on the associates, affiliates, or group companies, or the promoters, directors, or officers of the issuer

India’s Credit Rating

            Slowing growth rate, depreciation of rupee, high inflation, rising fiscal deficit have been the issues of serious concern for India in the recent past. Credit rating agencies have a negative outlook towards India. At present, India’s credit rating is BBB- (According to Fitch and Standard and Poor’s), the lowest investment grade rating. There have been warnings that India’s credit rating can be further downgraded to “Junk” status or to the speculative grade which puts India in the danger of being the first BRICS group of fast growing economies to be downgraded to “Junk” status. A credit rating downgrade would make it more difficult for the government and corporates to raise foreign loans and they would end up paying higher interest rates as well. The negative outlook will also lead to foreign investors turning more cautious about putting their money in the country. This reduction in the flow of much-needed foreign funds would adversely impact investment and increase pressure on the weakening rupee.

Government has announced reform measures, such as increasing domestic diesel price by about 12% and allowing up to 51% foreign ownership in multi-brand retail stores. The government also announced plans to increase the foreign ownership limit to 49% in insurance companies. In addition, the cabinet approved foreign investors owning up to 26% (or 49%, depending on the successful enactment of the amended insurance laws) in pension-related businesses. After a long wait, the government seems to have reignited reform efforts, and that bodes well for the future development of India and to make it an investment friendly economy. Can these reforms be the light at the end of tunnel? Looking at the present situation, we can just speculate it.