CREDIT RATING

Credit rating is primarily intended to systematically measure credit risk arising from transactions between lender and borrower. Credit risk is the risk of a financial loss arising from the inability of the borrower to meet the financial obligations towards its creditor.

In India, it is mandatory for credit rating agencies to register themselves with SEBI under SEBI Regulations 1999. There are 5 SEBI registered credit rating agencies in India, namely, CRISIL, ICRA, CARE etc which provide a rating on various categories of debt instruments.

Credit rating agencies assess the credit quality of debt issuers, on the basis of a number of quantitative and qualitative factors.

                            Rating Symbols

The ranking of credit quality is usually done with the help of rating symbols, which broadly classify instruments into investment grade. CRISIL'S credit rating falls under three categories: long term, short term and fixed deposit ratings.

High Investment Grades

AAA - (Triple A) Highest Safety

Debentures rated 'AAA' offers highest safety of timely payment of interest and principal. Though the circumstances can change the degree of safety.

AA - (Double A) High Safety

Debentures rated 'AA' offers high safety of timely payment of interest and principal. They differ in safety from 'AAA' issues only marginally.

Investment Grades

A- Adequate Safety

Debentures rated 'A' are judged to offer adequate safety of timely payment of interest and principal. However, changes in in circumstances can adversely affect such issues more than those in higher rated categories.

BBB - (Triple B) Moderate Safety

Debentures rated 'BBB' are judged to offer moderately safety of timely payment of interest and principal for the present; however, changing circumstances are more likely to happens and weakens the capacity to pay interest and repay principal than for debentures rated in higher rated categories.

Speculative Grades

BB (Double B) Inadequate Safety

Debentures rated 'BB' are judged to carry inadequate safety and principal, while there are less chances of default as compared to other speculative grades debentures in the immediate future.

B - High Risk

Debentures rated 'B' are judged to have greater susceptibility to default, while currently interest and principal payments are met. Circumstances can change and can leads to the lack of ability or willingness to pay, interest or principal.

C - Substantial Risk

The timely payment of interest and principal is possible only if favourable circumstances continue.

D - Default

Debentures rated 'D' are in default and in areas of interest or principal payments or are expected default on maturity. Such debentures are extremely speculative.