What Is Credit Rat­ing and Why Is It Im­por­tant?

Consumer Voice - - Bfsi -

A credit rat­ing is an as­sess­ment of an en­tity’s abil­ity to pay its fi­nan­cial obli­ga­tions. The abil­ity to pay fi­nan­cial obli­ga­tions is re­ferred to as ‘cred­it­wor­thi­ness’. Credit rat­ings ap­ply to debt se­cu­ri­ties like bonds, notes and other debt in­stru­ments. Credit rat­ing agen­cies (CRAs) pro­vide ‘ opin­ions’, or judge­ments, on the cred­it­wor­thi­ness of debt se­cu­ri­ties is­sued by a wide spec­trum of en­ti­ties, in­clud­ing cor­po­ra­tions.

Al­pha­bet­i­cal let­ter grades are used to in­di­cate credit rat­ing: AAA be­ing the high­est and safest, with lower grades rep­re­sent­ing an in­creas­ing scale of risk to the in­vestor. It pro­vides an opin­ion re­lat­ing to fu­ture debt re­pay­ments by bor­rower and pro­vides in­for­ma­tion on past debt re­pay­ments also. Rat­ing Sym­bol AAA AA A BBB BB B C D

Credit rat­ing is not a rec­om­men­da­tion to buy, hold, or sell a debt in­stru­ment. It is one of the tools used by in­vestors to make an in­vest­ment de­ci­sion. It is also ex­press­ing an opin­ion on the rel­a­tive de­gree of risk as­so­ci­ated with re­pay­ment on ma­tu­rity of the in­stru­ment. This opin­ion rep­re­sents a prob­a­ble es­ti­mate of the like­li­hood of a de­fault.

Com­pa­nies ap­proach credit rat­ing agen­cies with com­pli­ances, se­cu­ri­ties on of­fer, fi­nan­cial per­for­mance in­di­ca­tors of the com­pany, de­faults, etc. A com­pany can ap­proach more than one credit rat­ing agency to ob­tain more than one credit rat­ing. Se­cu­ri­ties and Ex­change Board of In­dia (SEBI) reg­u­lates the rat­ing agen­cies in the coun­try. De­scrip­tion (Ser­vic­ing of Fi­nan­cial Obli­ga­tions) High­est safety (low­est credit risk) High safety (very low credit risk) Ad­e­quate safety (low credit risk) Mod­er­ate safety (mod­er­ate credit risk) In­ad­e­quate safety (in­ad­e­quate credit risk) High risk (high risk of de­fault) Sub­stan­tial risk (very high risk of de­fault) De­fault (could in­vite de­fault any time)

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