ICRA Limited

Financial Rating Agencies

These agencies are more popularly known as Credit Rating Agencies (CRAs). In some countries they are also called as rating agencies. These agencies assign ratings to a debtor’s ability to pay back the debt by making timely interest payments and the likelihood of default. The debt instruments rated by CRAs include government bonds, corporate bonds, CDs, municipal bonds, preferred stock, and collateralized securities, such as mortgage-backed securities and collateralized debt obligations. The institutions whose ratings done may be companies, cities, non-profit organizations, or national governments, and the securities they issue can be traded on a secondary market.

A credit rating measures credit worthiness, or the ability to pay back a loan. It affects the interest rate applied to loans - interest rates vary depending on the risk of the investment. A low-rated security has a high interest rate, in order to attract buyers to this high-risk investment. Conversely, a highly-rated security (carrying AAA rating, like a municipal bond which is backed by stable government agencies) has a lower interest rate, because it is a low-risk investment. These low-risk bonds are available to a wide range of investors, whereas high-risk bonds cater to a narrow investing demographic.

The top three CRAs of the world are Moody’s, Standard & Poor’s and Fitch ratings. The first two controls around 80% of the world market and the third has 15% market share. Fitch Ratings and Standard & Poor's use a system of letter sliding from the best rating "AAA" to "D" for issuers already defaulting on payments. Moody's ratings follow a different system from "Aaa" to "C".

In India, the CRAs are CRISIL (Credit Rating Information Services of India Limited), ICRA (Investment Information and Credit Rating Agency of India Limited), CARE (Credit Analysis and Research limited), BWR (Brickwork Ratings), IRR (India Rating and Research Pvt. Ltd) and SMERA (Small and Medium Enterprises Rating Agency of India), ONICRA (Onida Credit Rating Agency), Ind-Ra (India Rating and Research, owned by Fitch Group). All the credit rating agencies in India are regulated by Securities and Exchanges Board of India (SEBI). The credit rating agencies are monitored and reviewed by SEBI.

For individuals, Credit Score is needed which is a three-digit number indicative of one’s credit behaviour. A high score means you have good money-management skills and that you repay your debts on time. Likewise, a low score raises questions about your financial credibility. In India, this is done by CIBIL (Credit Information Bureau (India) Limited), which is the most acceptable credit ratings for an individual.