Credit rating for Companies & its Importance

Importance of reading Credit rating for an Investor

Introduction:

A credit rating is an opinion expressed by a credit agency evaluating an entity’s ability and desire to meet its financial obligations on time. Additionally, a credit rating indicates the possibility of a debtor defaulting. It is an estimate of the ability of a person or organization to meet their financial commitments, based on previous dealings. In terms of companies, it means the ability to meet their outstanding liabilities and debts, and the capability to raise money when needed.

Top credit rating agencies in India:

  1. Credit Rating Information Services of India Limited (CRISIL)
  2. Investment Information and Credit Rating Agency of India Limited (ICRA)
  3. Credit Analysis and Research Limited (CARE)
  4. India Rating and Research Private Limited
  5. Acuitรฉ Ratings & Research
  6. Brickwork Ratings India Private Limited

Importance of credit score:

  1. With a higher credit score, companies can borrow easily.
  2. A credit score is a report card for companies creditworthiness.
  3. A good credit score will improve the goodwill of the company.ย Hence, lowering the interest rates on loans.
  4. Credit scores will help stakeholders to access the company better.

How does the rating work?

The company’s creditworthiness is rated Alphabetically. Thus, “Rating A” stands for a good credit rating with low credit risk; “Rating B” stands for an average credit rating with moderate credit risk; “Rating C” will amount to a low credit rating with high credit risk, and “Rating D” stands for a defaulted party.

Credit Rating Scales:

Rating ScaleSymbol
Lowest credit risk / Excellent credit ratingAAA
Very low credit risk / Very good credit ratingAA
Low credit risk / Good credit ratingA
Moderate credit risk / Average credit ratingBBB
High credit risk / Low credit ratingB
Very high credit risk / Poor credit ratingC
DefaultedD

Types of credit ratings:

  • Bank Loan Credit Rating
  • Corporate Debt Rating
  • Corporate Governance Rating
  • Public Finance Rating
  • SME Rating etc. 

Difference between Credit Rating and Credit Score?

While the phrases “credit score” and “credit rating” are sometimes used interchangeably, they are not synonymous.

As discussed previously, a credit rating is used to assess a business’s or company’s creditworthiness. This simply refers to their likelihood of defaulting on payments. The alphabetical sequence of symbols is often used to show the rating. For example, “rating AAA” (triple-A) represents one of the most favorable grades, so any borrower with such a rating will be provided loans at an affordable interest rate.ย 

A credit score, on the other hand, is a number, often between 300 and 900, assigned to individuals to indicate their creditworthiness. Credit bureaus compute it using the individual’s credit information report, and it is used to determine whether or not they are authorized for loans and credit cards.

Importance of credit report:

At the beginning of the report, we have the purpose of the report and the score afforded. Then, we have the rationale behind the ratings, (which is very important!)

We also have SWOT analysis is done, where the rating agencies explain the companies’ current strengths, weaknesses, opportunities, and threats being faced. And, then we get to the most important paragraph. That is the “liquidity analysis” where we get the company’s current cash position, the liquidity supports available, and then get to see a one-liner “rating sensitivity factors”, be it positive or negative.

In conclusion, we have a brief about the company, the financials, and the rating table.

So, reading a credit report gives an investor various aforementioned information and keeps an investor up-to-date with the company’s financial progress.ย 

Importance of Credit Rating:

A credit rating is an evaluation of a borrower’s creditworthiness. A higher credit rating indicates that the business or organization is more likely to repay the borrowed credit. On the other hand, a lower credit rating may indicate a greater likelihood of becoming a defaulter. This can make borrowing money more difficult for them since lenders will view them as high-risk borrowers.

Importance For Lenders:

  1. With credit reports, lenders and investors may make better decisions regarding the company’s credit worthiness.ย 
  2. When lenders are aware of a potential borrower’s credit rating, they may feel comfortable that their money will be repaid on time and with the right interest rate.

Importance For Borrowers:

  1. Businesses that have good credit are seen as less risky, so loan applications are more likely to be approved when they have good credit.
  2. Lenders such as banks and financial institutions will provide lower interest rates on loans to organizations with better credit ratings.

Importance of Credit Rating in India:

  1. Each credit rating agency comes up with its own way to figure out how good a company’s credit is based on things like how quickly it pays for goods and fees, how much cash it has, how much working capital it has, and how much money it has.
  2. It happens once a month that these companies get information from their partner banks and other financial institutions about their customers’ credit.
  3. Once a credit rating request is submitted, these organizations gather information and compile a report based on these parameters.
  4. They rate each person or business and give them a credit rating based on the information in their report.
  5. Banks, financial institutions, and investors use this grade to determine whether to invest money, purchase bonds, or extend a loan or credit card.
  6. The better the credit score, the more likely it is that a person will be able to get a loan with a lower interest rate.

Conclusion:

Credit ratings are used to determine the creditworthiness of individuals, groups, enterprises, not-for-profit organizations, governments, and even whole nations. When at the time of borrowing, the borrower’s ability to borrow is evaluated by proving with scores or grades. The higher the grade, the better their ability to service the debt (pay off interest). So, better interest rates.

Credit rating companies do a lot of research to come up with this rating. They look at various elements to evaluate the borrower’s history of borrowing and lending money, their ability to pay back debt, their debts from the past, and how well they might be able to make money in the future.

A favorable credit rating enhances trustworthiness and demonstrates a track record of repaying debts on time in the past. It helps banks and investors decide whether to give loans and how much interest they charge.

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Disclaimer: All the information on this website is published in good faith and for general information purposes only.

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