Credit standing has been a vital part of financial health for years. It has been a great tool to help lenders assess the creditworthiness of a borrower. Generally, credit score and credit rating is used to figure out the degree of financial risk that an individual or business bears, respectively. However, often people confuse themselves between the credit score and credit rating. While the two terms are used for the same purpose, there remains a thin line difference between the both.
What is a credit score?
Credit score is a three-digit numerical expression of an individual’s financial health. The scores, ranging from 300 to 900, are calculated on the basis of certain factors such as payment history, credit utilization, length of credit accounts, credit mix, and public records (if any).
The information is primarily reported by the existing lenders like banks and financial institutions to credit bureaus in order to compute the scores. These scores are then used by potential creditors in future to determine the degree of risk posed by an applicant. Hence, it won’t be wrong to say that credit score is a key factor to evaluate creditworthiness of an individual.
What is credit rating? On the other hand, credit rating is a quantified assessment of the business or corporate company on the scale of 0 to 10, in order to determine their financial standing. Credit rating is basically assigned to an entity (corporation, state, provincial authority or sovereign government) that is willing to borrow funds in order to conduct certain operations. Credit assessment for companies and governments is generally done by credit rating agencies, rather than the credit bureaus.
However, as credit agency not involved in the transactions, it is deemed to provide an unbiased and independent opinion of the risk carried by any entity seeking to raise funds through loans, credits and/or bond issuance. Credit rating agencies in India Undoubtedly, entity’s credit rating plays a major role in determining financial health and in fact, is a primary factor that the lenders look at to evaluate the interest rate for sanctioning loan and credit. However, the scoring model is different for every credit rating agency, though the major contributors remain the same such as repayment history, debt liability, credit exposure, profitability, and credit utilization. The better is the rating, higher the chances for loan approval at better interest rates. So, let’s check out the list of credit rating agencies operating in India.
CRISIL: CRISIL is an analytical company that provides services like credit ratings, data, research, analytics, and financial solutions in order to promote better functioning of the market. It was the first rating agency introduced in India jointly by ICICI, UTI, SBI, LIC, and United India Insurance Company in 1988. Later, US-based credit rating agency S&P acquired the company with 51% market share.
The agency mainly targets micro, small and medium companies to large corporates, investors, and top global financial institutions. Furthermore, it also has the market presence in the United States (US), the United Kingdom (UK), Poland, China, Argentina, Hong Kong, the United Arab Emirates, and Singapore.The agency evaluates its clients’ financial standing on the alphabetical scale of:
- AAA, AA, A – Good Credit Rating
- BBB, BB – Average Credit Rating
- B, C, D – Low Credit Rating
Originally known as Investment Information and Credit Rating Agency of India Limited, ICRA was established in 1991 as an independent and professional investment information and credit rating agency. It is a public limited company set up by the prominent financial institutions, commercial banks and financial service companies. The shares of ICRA are also listed on the Bombay Stock Exchange and the National Stock Exchange.
ICRA computes the credit ratings in symbolic representations on the basis of relative credit risk associated with the debt obligations. The rating can be understood as the ranking of credit risk. The agency provides precise credit information and guides banks and financial institutions to make an informed decision. It enhances the ability to access the money market and the capital market with complete transparency and efficiency.
The agency has different credit rating scale for the long-term, medium term, and short term. Long term rating scale:
- AAA – This is considered as highly safe in terms of timely payments and other financial obligations.
- AA – Such instruments carry very low credit risk and the application can be considered for quick sanctioning of fresh loan.
- A – This rating has adequate degree of safety and carries low credit risk.
- BBB – Instruments falling under this rating scale have moderate degree of safety and equally moderate credit risk.
- BB – These instruments have moderate risk of defaulting payment due to high financial obligations.
- B – These carry high risk of defaulting the due payments.
- C – They have very high risk of default and it is not considered safe to grant a new loan or credit.
- D – Instruments under this scale are either already in default or expected to default soon.
- MAAA – It is the highest rating in terms of quality and carries the lowest credit risk.
- MAA – Instruments falling under this rating scale carry quite low risk of default.
- MA – It is an adequate credit quality rating and bears average credit risk.
- MB – An inadequate credit quality rating that carries high credit risk.
- MC – This is the credit-risk prone rating range and the carries very high risk of default.
- MD – It is the lowest rating range that has extremely low prospects of recovering from the debt load.
- [ICRA] A1 – These instruments are considered as extremely safe regarding timely payment and carry no or extremely low credit risk.
- [ICRA] A2 – This rating range is said to have high degree of safety and low credit risk.
- [ICRA] A3 – This range carries moderate risk of default and equally moderate degree of safety.
- [ICRA] A4 – Instruments under this range have minimal degree of safety and very high credit risk.
- [ICRA] D – Instruments under this rating range are either already in default or carry high risk to default any time soon.
Small and Medium Enterprises Rating Agency of India (SMERA) was incorporated in the year 2005 under the guidelines of Government of India. The key objective of the agency was to target the micro, small and medium enterprises in terms of credit rating services. It is registered under the SEBI and was accredited by the Reserve Bank of India in 2012. The agency rates the credit and loans under Base II Guidelines. It basically targets instruments like IPO, Commercial papers, Bonds, NCDs, security receipts, and fixed deposits, which can be used to evaluate capital adequacy requirements by the banks and financial institutions authorized by the RBI.