What is Credit Rating?

Credit rating measure how likely an entity is able to repay the loan amount. These ratings are provided by registered Credit Rating Agencies (CRAs) based on the entity’s income and past repayment behaviour. A high credit rating signals a strong repayment history and responsible credit behaviour while a low credit rating means a bad repayment history and can even lead to rejection of loan application.

Banks and NBFCs heavily rely on these credit ratings to decide whether to approve or deny any loan application. Go through this blog to learn more about how credit ratings work and why they are important.

Credit ratings are determined by the credit rating agencies. These ratings are based on several factors, such as:

• Repayment behaviour
• Debt level
• Income stability
• Cash flow
• Credit enquiries

The Credit Rating Agencies like Equifax, Experian and TransUnion gather these information from partner banks and other financial institutions every month. They gather data on the following points:

• Credit history
• Repayment behaviour
• Credit utilization
• Age of credit
• Number of credit enquiries
• New credit

Based on this report, they assign a credit rating to the borrower. Banks, financial institutions and investors then use this rating to assess the risk of lending a loan amount to the borrower.

Credit ratings are mainly categorised into two types. These are - Investment Grade and Speculative Grade. These ratings are majorly graded from the highest (AAA) to (D) lowest which might vary as per the agency and company’s profile.

• Investment Grade

Investment grade credit ratings indicate that a company has made sound investment decisions and can repay its debts on time. Companies with this rating can easily get loans at low interest rates.

• Speculative Grade

Companies with speculative-grade ratings have made risky business investments and may struggle to repay loans on time. These companies can still get loans but at higher interest rates.

Given below is the list of entities that often review the credit ratings of companies and enterprises:

• Investment banks
• Lenders, such as banks, NBFCs and other financial institutions
• Retail and institutional investors
• Debt issuers
• Other business entities

Here are the top credit rating agencies in India:

• Credit Rating Information Services of India Limited (CRISIL)
• Credit Analysis and Research (CARE) Limited
• Investment Information and Credit Rating Agency of India (ICRA) Limited
• INFOMERICS Valuation and Rating Private Limited
• India Ratings and Research Private Limited
• Acuité Ratings & Research Limited
• Brickwork Ratings India Private Limited

The following table highlights the credit rating scales assigned by the different credit rating agencies:

Credit rating is very important to determine your creditworth and financial goal. It shows how well you handle money based on your past borrowing and repayment history. Given below are the major adavantages of credit ratings:

• Easy Loan Approvals

Credit ratings help lenders evaluate the risk of lending money to the borrower. High credit ratings can make loan approval easier, while low ratings can make it challenging or even lead to rejection of loan application. Lenders are more likely to approve your loan applications when you have a strong credit rating.

• Lower Interest Rates on Loans

Borrowers with high credit scores generally receive lower interest rates on loans and credit cards. While, those with low credit ratings may face higher interest rates.

• Lower Insurance Premiums

Insurance companies use credit ratings to set premiums for your insurance policies. Higher credit ratings suggest lower risk, which can result in lower premiums.

• Risk Assessment

Banks and NBFCs would reject your loan application if they get a history of bad repayment behaviour or default payments to avoid any risk. Therefore, by assessing the credit ratings they get an idea about the creditworthiness of a company or an individuals and the risk factor attached to them.

Credit ratings are essential for measuring a borrower's creditworthiness. Several factors affect these ratings:

• Lending and Borrowing History

Credit rating agencies assess the individual’s or the company's history of borrowing and repaying debts, paying close attention to any defaults or late payments.

• Financial Statements

Agencies analyse the company's financial statements, including balance sheets, income statements and cash flow statements, to gauge its financial health.

• Level and Type of Current Debt

Existing debt levels and the nature of the debt, whether short-term or long-term liabilities are important factors in the credit rating evaluation.

Overall, a credit rating is essential for assessing a borrower's creditworthiness and financial health. Knowing how credit ratings work and what affects them is vital for anyone seeking loans. By keeping a good payment record, managing credit usage well and having different types of credit, borrowers can boost their credit scores and enjoy the advantages. Staying informed and proactive about credit ratings can ultimately lead to more financial opportunities and long-term stability.