Remember, when someone wants to apply for a credit card, they get asked to submit various documents. “Documents never lie” is the principle followed by banks as documents talk a lot about the person. Documents such as health insurance, annual income reports, housing expenditures, employment status, and hundreds of such things tell banks about a person’s capability to repay credit card debts or loans.
Similarly, when an institution or a company needs to take a loan, the company needs to be evaluated. As the institution is vast, the process is a little complicated. So, this is where credit rating agencies get into force.
What is a Credit Rating Agency?
Credit rating is the process of assessing the capacity of an institution or any entity to pay back the loans. The agencies aim at measuring the borrower’s creditworthiness.
Credit rating agencies play a vital role in determining the worthiness of a borrower for successful relations between the lender and the borrower. The borrower’s financial background shall be tested when they apply for the loan. This process is known as credit rating. The rating process includes the past borrowed amounts, how they were repaid, and other details.
Based on their analysis, the borrower will get a credit report. The credit report or credit rating consists of a three-digit number that determines whether or not the borrower is eligible for loans and credit cards.
The ratings are given based on the borrower’s behaviour with their past payments. The three-digit number on the credit report ranges from 300 – 850.
850 is the best score, while 300 is the worst. And the numbers between 700 – 749 are considered to be good. These numbers can be affected if the borrower fails to meet any of these fundamentals:
- Payment history – 35%
- Credit utilization – 30%
- Credit history length – 15%
- New credit – 10%
- Credit mix – 10%
In India, the report card contains a digit-digit alphabet. They are easily understandable. If the report card consists,
- IND AAA: Tells that the borrower is much safer to lend money (highest safety).
- IND AA: Says that the borrower is safer (more safety).
- IND A: Tells that the borrower can be trusted (low risk).
- IND BBB: Says that the borrower is on the verge of losing trust(moderate safety).
- IND BB: Tells that the borrower may be or may not be trusted (Average risk).
- IND B: It says that the borrower cannot be counted (High risk).
- IND C: Tells that the borrower may not pay to repay the debts ( very high risk)
- IND D: Tells that the borrower is a defaulter (Default).
Factors that affect the credit score in India:
The credit score is crucial for any entity to get approved for the funds. However, here are some factors that affect credit scores in India.
1. Irregular bill payments:
If there is one thing that can affect the credit score the most, it is not paying bills on time. The lender expects the borrowers to pay the bills on time. If failed, that increases the assumption of becoming a defaulter.
2. Frequent loans receiving:
Whenever the borrower applies for the loan, the lender conducts the credit rating to verify that the borrower is not the defaulter. So, every time they access a new fund, the reports create a poor impression. It can affect the credit score.
3. Having poor credit knowledge:
The common mistake many commits is applying for the same loan over and over. Instead, applying for different loans shows the borrower’s capability to handle various funds. It creates positive vibes.
Again, the borrower should take care of the credit bills and be wise while dealing with money.
The Best Credit Rating Agencies
1. Credit Rating Information Services of India Limited (CRISIL):
CRISIL, launched in 1987 and went public in 1993, is one of the oldest Indian credit rating agencies with a market share of more than 60%, headquartered in Mumbai, India. CRISIL launched India’s first index to gauge the performance of foreign portfolio investors (FPI) investments in the fixed-income market in the Indian rupee and US dollar versions in 2018.
Their portfolio includes Unit Linked Insurance Plans (ULIP) rankings, mutual funds ranking, the CRISIL coalition index, and many more, while their services range in finance, manufacturing, SME sectors, and service.
CRISIL is the best agency in India. However, its majority stake is held by Standard & Poors, the world’s largest rating agency.
2. Investment Information and Credit Rating Agency of India Limited (ICRA):
ICRA Limited, established in 1991, roots its headquarters in Gurgaon. It is an Indian independent and professional investment information and credit rating agency owned by Moody’s corporation. Until April 2007, it was under the control of Moody’s Corporation and various Indian commercial banks and financial service companies. Later on 13 April 2007, the entire company went public under the listing of the Bombay Stock Exchange and National Stock Exchange.
The product portfolio includes a rating for – corporate debt, financial rating, structured finance, infrastructure, insurance, mutual funds, project and public finance, SME, market-linked debentures, and so on.
The ICRA group of companies has four subsidiaries – Consulting and Analytics, ICRA Lanka, Data Services and KPO, and ICRA Nepal. Presently, Moody’s Investors Service and the international Credit Rating Agency are the largest shareholders of ICRA.
3. Credit Analysis and Research Limited (CARE)
CARE, established in 1993, is the second largest credit rating agency headquartered in Mumbai, India. Canara Bank, Unit Trust of India (UTI), Industrial Development Bank of India (IDBI), and other financial and lending institutions support CARE.
- CARE expands credit rating services to corporate governance, debt ratings, financial sector, bank loan ratings, issuer ratings, recovery ratings, and infrastructure ratings.
- CARE also offers long-term and short-term debt instruments, the two different categories of bank loan ratings.
- CARE offers ratings for real estate, Initial Public Offerings (IPOs), financial assessment of shipyards, renewable energy service companies (RESCO), and Energy service companies (ESCO) grades for various courses in educational institutions.
On their expanding terms, CARE has launched a new international credit rating agency called ARC Ratings in collaboration with four other partners from South Africa, Portugal, Brazil, and Malaysia. ARC Ratings has started operations and completed the sovereign ratings of countries.
4. Brickwork Ratings (BWR):
Brickwork Ratings, established in 2007, is one of the leading credit rating agencies headquartered in Bangalore, India. It is a SEBI registered, RBI accredited rating agency and promoted by a leading public sector bank, Canara bank, though funded by bankers, former regulators, professors, and credit rating professionals.
- They offer rating services on Bank Loans, NCD, Securitised paper, Security receipts, Commercial Paper, Fixed deposits, and many more.
- They also grade NGOs, real estate investments, tourism, IPOs, hospitals, IREDA, educational institutions, MFI, and MNRE.
BWR had rated debt instruments worth ₹ 19,02,200 Cr and Fixed Deposits and Commercial Papers worth over ₹ 83,555 Cr. The core values of the brand while rating include integrity, accountability, continuous improvement, and collaboration.
5. India Ratings and Research Pvt. Ltd:
India Ratings and Research Pvt. Ltd, headquartered in Mumbai, is one of the leading credit rating agencies in the country to provide the credit markets with accurate, timely, and prospective credit opinions.
Their rating portfolio includes financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies, corporate issuers, and structured finance and project finance companies.
SEBI and RBI, along with the National Housing Bank and Securities and Exchange Board of India, recognized Ind-Ra.
6. Small and Medium Enterprises Rating Agency of India (SMERA):
Small and Medium Enterprises Rating Agency of India, commonly known as The SEM Rating Agency, was established in 2005 and is a joint initiative of SIDBI, Dun & Bradstreet India, and leading banks of India. Acuité Ratings & Research Limited is the parent of the SEM Rating Agency.
SMERA collaborated with prominent institutions like IIT Madras and other agencies like The Bangladesh Rating Agency Limited, CAFRAL, CoinTribe, and SIES. SMERA was built to rate small-medium enterprises, and they had accomplished 7000 ratings since its establishment.
7. Onida Individual Credit Rating Agency of India (ONICRA):
Mr Sonu Mirchandani incorporated ONICRA on 23 October 1993 in Gurgaon. It is a rating agency focused on Small and Medium Enterprises and Individuals.
Their portfolio shows that they have broad experience in Accounting, Finance, Back-end Management, Analytics, and Customer Relations. ONICRA has rated more than 2500 SMEs.
8. Fitch India:
Fitch India, founded on 24 December 1913 (108 years ago), is an American Credit Rating Agency headquartered in New York City, USA. And Fitch India’s headquarters is in Mumbai. It is a global rating agency that provides the world’s credit markets with independent and prospective credit opinions, research, and data. Fitch Ratings is one of the world’s top three credit rating agencies.
Fitch Ratings and Fitch India are the children of the parent organizations Hearst Corporation and Fitch Group. Over 2000 people work for Fitch Ratings, and they have 20,000 entities around the world.
9. Infomerics Valuation and Rating Private Limited:
Infomerics Valuation and Rating Private Limited is a credit rating agency based in New Delhi, India. It is accredited by The Reserve Bank of India and registered by SEBI.
Through an unbiased assessment and evaluation of the creditworthiness of banks, they offer rating services to non-banking financial companies (NBFCs), small and medium scale units (SMUs), and large corporates.