Credit scores have gained a lot of popularity off late. These scores are assigned to individuals and it demonstrate their creditworthiness. A credit score shows the future lender the degree of risk that a lender has to take in lending to that particular individual.
On the lines of an individual being assigned a credit score, companies or businesses can also have a credit score. Business credit scores are also assigned by the Credit Information Companies or the Credit Bureaus. The function of a business credit score is also on the similar lines of an individual. This decides the creditworthiness of a business which in turn decides the availability of credit to a business organization.
However, you must have often come across a term called as Credit Rating often used for businesses. So what does a Credit Rating indicate? Who gives a credit rating? What is the process of getting a business credit rated? Is it necessary for all businesses to go in for a credit rating? These are some of the basic questions that many business organizations have approached us with, many a times.
So we are coming out with this article that aims at clearing the air over credit ratings and the concepts around it. We shall also aim to include a few pointers that will help businesses achieve a good credit rating.
What are Credit Ratings?
Credit ratings are assigned by Credit Rating agencies like CRISIL, ICRA, India Ratings, etc and aim to give a qualitative and a quantitative assessment of the probability of a default by the business organization on the debt that they have taken. It cannot be construed as a recommendation by the credit rating agency for the investor to take a position in the debt instrument. Instead, it only acts as an additional information on which the investor can base his/her decision.
How Does A Credit Rating Differ From A Credit Score?
Through a credit rating, the agency offers its opinion on the risk involved with the future debt repayments by borrowers. On the other hand, a credit score assigned by a credit bureau presents information on past debt repayments by borrowers. It aids the lenders in making an informed decision while lending to the borrower.
Which Are The Main Agencies That Assign Credit Rating In India?
Following are some of the important credit rating agencies in India
Credit Rating Information Services of India Ltd. (CRISIL)
Credit Analysis and Research Ltd. (CARE)
Investment Information and Credit Rating (ICRA)
India Rating and Research (Ind Ra)
Are only businesses credit rated?
Credit ratings can be obtained not only by the corporate but also by the Governments or Quasi-Government bodies who have the intention of raising money for various projects. A country can also be rated to express the level of confidence that international agencies have over the ability of a country to service its debt commitments.
There are a separate set of ratings also available for the Small and Medium Enterprises too.
Additional Reading: Personal Credit Score vs Business Credit Score
How are the Credit Ratings denoted?
Unlike credit scores which are represented on a scale of 300-900 by all credit bureaus in cases of individuals, each credit rating agency uses a different set of rating code to denote credit ratings for various instruments. We present below the various credit rating symbols used here in India to indicate different grades of risk.
|Highest Safety||High Safety||Adequate Safety||Moderate Safety||Moderate Risk||High Risk||Very High Risk||Default|
The name of the issuer is generally used as a prefix.
For Example :A highest safety rating from CRISIL would be denoted as CRISIL AAA so that an investor knows which rating agency has rated that particular corporate.
In addition, symbols like + or - may be attached to the rating to reflect comparative standing in the category.
Again different instruments may have different symbols for ratings different instruments.
For Example: India Ratings use a different set of scale like A1, A2, A3, A4 and D for Short Term Instruments.
Is Credit Rating a One Time Exercise?
A credit score is a dynamic score that changes depending on the credit behavior of the individual. If you default on your payments, your score goes down and vice versa.
However, a credit rating is not that dynamic. The ratings issued are monitored continuously by the issuing agency and if there is a huge change in dynamics of the company, then the credit agency may alter the rating given earlier. Otherwise, the rating issued is construed to be valid till the term of the debt instrument.
Therefore, once the rating is issued there is nothing much a corporate can do to improve the ratings. However, the ratings can be downgraded in case of the factors involved in determination of credit ratings changing significantly.
Is the Credit Rating available for all to access?
Credit ratings are available in the public domain and investors can easily access the ratings given to any corporates. This is quite a departure from the credit scores which can only be accessed by the individual or the lender when the individual applies for credit.
What Is The Process Followed For Issuing Credit Ratings?
The process followed in assigning a credit rating is
Ratings request from an issuer of debt
Initial Evaluation by the Rating agency
Meeting with the management of the issuer
Analysis of various factors involved in running of the company
Rating committee reviews the analysis and votes on the ratings
The issuer is notified about the rating
Dissemination of the information to the public takes place through various channels
Surveillance of the rated issues or issuers is carried on an ongoing basis
What are the factors on which a credit rating is assigned?
Credit ratings are both a qualitative and quantitative representation of the opinion of the credit rating agency. Hence a lot of factors are taken into effect before the credit ratings are issued.
The factors start from macro and microeconomic factors affecting the country and the industry in which the company is operating. It also focuses on the competitive position held by the company vis-à-vis its competitors in the respective industry.
The financials also play a strong role. The capital structure, financial policies in place, cash flow and liquidity position of the company also have a big role in deciding the credit rating. The governance and management policies have equal weight here.
Moreover, different factors are considered for evaluating the credit ratings of companies belonging to different industries. For example, an FMCG company has different factors deciding its profitability than from one in the banking sector.
Credit ratings present a fair view of the rating agency about the probability of default on a debt by the issuer. However, the ultimate decision to invest in an instrument has to be taken by an individual.
Additional Reading: All You Need to Know About Building Good Business Credit