Credit Ratings and the Credit Rating Agencies

Credit Ratings and the Credit Rating Agencies


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.


Gold Taking Shine Off Indian Economy

Gold Taking Shine Off Indian Economy


Akshaya Tritiya in 2004 marked the beginning of a trend in Indian economy which changed its shape remarkably. India was a ‘Golden Bird’ once and then various foreign invasions followed by British rule exploited Indian gold reserves completely and spared a very less amount in the hands of native people. But if we have a look at the past few years, ironically, it seems like Indian masses have decided they will bring the glory back to the country and they have taken all the burden on their shoulders itself. Else, its difficult to explain the gold buying spree that is making new records each year.

India’s current account deficit problem has been driven by the insatiable demand of gold by the customers in the first place. With just three working gold mines in Jharkhand and Karnataka, all the demand is met by importing gold from UAE, Australia etc. As a result, the imports increase every year due to the ever increasing demand of gold, thereby widening the fiscal deficit. The wedding season in India is an occasion that demands a much bigger spending spree on gold than any other festive season in the country. Ostentatious weddings are the perfect occasions to show off one’s jewellery. Apart from this, precarious market nature and low return on investments in various institutions have shifted the interest of investors to gold which has been quite successful in giving back excellent returns.

The glittering yellow metal has always been a reason of worry for the economic policy makers. Too much investment in gold reduces the liquidity in the market. Fiscal deficit is widening with the increasing oil prices, weak government and adding to that, heavy imports of gold.

Government has been trying to curb the gold imports but love for the metal has failed all the policies adopted till now. People keep on purchasing gold for marriages, dowry, offerings in temples and nevertheless as investment. Import duty was doubled to 4% last year but didn’t produce the results as expected. Now, Finance ministry is thinking of regulating the gold imports by fixing the upper cap and it has further increased the import duty to 6% but there is a risk associated. There is a very high probability that it may wake up a sleeping devil – Smuggling.

The motive with which institutions like Muthoot, Manappuram were allowed also seems to have backfired. Loans provided by them do increase the liquidity to some extent but they have made gold loans readily available to everyone thereby increasing the tendency of the investors to buy more gold that will not only ensures good value addition but can also be encashed easily when required. The funds used to buy gold are misallocated capital because when the capital will be needed for investments, it will be difficult to find it as it has already been invested as gold.

While any policy aimed directly at curbing imports is unlikely to succeed in the long term, there is a ray of hope for the government, and it lies with the vast gold stocks that Indian households have. The RBI report talks of ways to fulfill some of the domestic demand for gold by further unlocking that vast stock of gold, such as by making banks and importing agencies that bring gold into the country, act as both buyers and sellers of domestic gold (rather than just sellers as of now). Perhaps India’s current account deficit problem could be solved by the same public who drove that deficit upward in the first place.