General Questions

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The full form of CRA is Credit Rating Agency.

A credit rating agency is an entity which assesses the ability and willingness of the issuer company for timely payment of interest and principal on a debt instrument.

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  • Credit Rating Information Services of India Limited (CRISIL)
  • ICRA Limited
  • Credit Ratings Limited (CARE)
  • Brickwork Ratings India Private Limited (BWR))
  • India Rating and Research Private Limited (Ind-Ra)
  • Acuite Ratings and Research Limited (Erstwhile SMERA)
  • Infomerics Valuation and Rating Private Limited

A credit rating agency is a company whose purpose is to assess the ability of borrowers, either governments or private enterprises, to repay their debt. To do this, these agencies issue credit ratings based on the borrower’s solvency.

A credit rating represents the rating agency’s opinion on the likelihood of a rated debt obligation being repaid in full and on time. A simple alphanumeric symbol is normally used to convey a credit rating.

Eg: – Long Term Instruments – AAA, AA, A, BBB etc. Short Term Instruments – A1, A2, A3, A4 etc

Each rating symbol is an alphanumeric representation of the probability of degree of repayment risk associated with debt instruments.

The rating is assigned to a security or an instrument.

Credit rating is an assessment of the probability of default on payment of interest and principal on a debt instrument. It is not a recommendation to buy, sell or hold a debt instrument. Rating only provides an additional input to the investor and the investor is required to make his own independent and objective analysis before arriving at an investment decision.

Ratings are based on a comprehensive evaluation of the strengths and weaknesses of the company fundamentals including financials along with an indepth study of the industry as well as macro-economic, regulatory and political environment.

Credit ratings assigned by the credit rating agencies to various instruments are made available by the agencies through press releases and on their respective websites. The same are also available in the prospectus or the offer document of the issuer company and in media advertisements.

Plus and minus symbols are used to indicate finer distinctions within a rating category. The minus symbol associated with ratings has no negative connotations. In fact, ratings in a higher rating category such as ‘AA-‘ are stronger than ratings in a lower rating category such as ‘A+’.

Rating is an opinion based on information available at a point in time with the rating agency and expectations made on the basis of such information by the agency. However, information can change significantly over time causing the rated instruments performance to deviate from the earlier expectations thereby affecting the future repayment abilities and thus, requiring the rating to be altered.

Ratings are forward-looking opinions. A rating outlook goes a step ahead and informs the investor of the likely movement in the credit quality of the rated instrument. Additionally, investors can use the outlook to differentiate amongst instruments at similar rating levels.

Rating is monitored throughout the life of the instrument. A downgrade in the rating indicates that the risk of default of the instrument is higher than what was earlier predicted.

An investment grade rating signifies the rating agency belief that the rated instrument is likely to meet its payment obligations. In the Indian context, debt instruments rated ‘BBB’ and above are classified as investment grade ratings. Instruments that are rated ‘BB’ and below are classified as speculative grade category ratings in which case the ability to meet the payment obligations is considered to be “speculative”. Instruments rated in the speculative grade are considered to carry materially higher risk and a higher probability of default compared to instruments rated in the investment grade.

Credit rating agencies are regulated by SEBI & RBI. The SEBI (Credit Rating Agencies) Regulations, 1999 govern the credit rating agencies and provide for eligibility criteria for registration of credit rating agencies, monitoring and review of ratings, requirements for a proper rating process, avoidance of conflict of interest and inspection of rating agencies by SEBI, amongst other things.

No. SEBI does not play any role in the assessment made by the rating agency. The rating is intended to be an independent, unbiased and professional opinion of the rating agency.

SEBI has, from time to time, taken several steps to strength the process of credit rating. SEBI directives require the credit rating agencies to be transparent and disclose to the public the information which may have a material bearing on the ratings, any sources of conflicts of interest while undertaking the rating exercise, rating methodology, rationale of the ratings, etc

Credit ratings help investors facilitate comparative assessment of investment options, complement the investors’ own credit analysis, and allow asset monitoring.

A credit rating is a professional opinion given after studying all available information at a particular point of time. Nevertheless, such opinions may prove wrong in the context of subsequent events. There is no contract between an investor and a rating agency and the investor is free to accept or reject the opinion of the agency.

Each credit rating agency may have its own set of criteria and different weight age for each component for assigning the ratings. Some of the common factors that may be taken into consideration for credit rating are Issuer Company’s operational efficiency, level of technological development, financials, competence and effectiveness of management, past record of debt servicing, etc.

The credit rating agencies are required to continuously monitor the ratings assigned by them to a particular instrument. In case of any changes in the ratings so assigned, the agencies are required to disclose the same through press releases and on their respective websites.

No. To protect the interest of investors, SEBI has mandated that every credit rating agency shall during the lifetime of the securities rated by it, continuously monitor the rating of such securities and carry out periodic reviews of all published ratings.