2021-07-12 12:12:29

CREDIT RATING IN INDIA

INTRODUCTION

Over the past 20 years, the credit rating has been considerable interest in the financial markets. Simply put, a credit rating is an assessment of the creditworthiness of a company. There are many credit rating agencies in the country, and for the evaluation of the companies and organizations are following the evaluation of its solvency, the amount received will be in debt.

Credit rating is a numerical representation of the creditworthiness of an individual or a business. The credit rating is a key aspect that makes or breaks a loan application. The credit rating/score acts as an indicator stating if the borrower has defaulted on loan payments before and if he is worth trusting with the new loan. There are several credit rating agencies in India. For example CRISIL Ltd., India Ratings and Research Private Limited, ICRA Limited, CARE, Brickwork Ratings India Private Limited, SMERA Ratings Limited, and Info metrics Valuation and rating Private limited.

MEANING OF CREDIT RATINGS

A credit rating is a 3-digit number that represents the creditworthiness of the borrower. A credit rating is the evaluation of the possible credit risks related to granting an economic instrument to an individual or an organization. Based on the credit rating, a lender determines whether or not the borrower can repay the loan amount or not.

The rating is provided based on the creditworthiness and the credentials of a character or a company. The creditworthiness of an individual or a company is decided based on the lending and borrowing transactions done in the past. A credit score is decided after weighing the statements of liabilities and assets, and their ability to meet the debt obligations. It is usually recommended that you maintain a great credit score in case you would like to apply for a large loan in the future. You can maintain a good rating given that you pay all your existing debts on time, check your credit report once in a while to stay informed of your rating, and keep your credit utilization ratio under 30%.

The credit rating is decided based on the following factors:

Payment History: 35%
Credit Utilization: 30%
Credit History Duration: 15%
Credit Mix: 10%
New Credit: 10%

CREDIT RATING AGENCIES

Credit rating agencies (CRA) reviews and evaluate the credit standing of a person or a company. That is, these are the settings for the treatment of the debtor's income, and the credit lines, the analysis of the debtor's ability to repay the debt or the existence of an associated credit.

The Securities and Exchange Board of India (SEBI) and reserves the right to approve and regulate credit-rating agencies, in accordance with the SEBI Regulations of 1999, of SEBI Act, 1992.

WORKING OF CREDIT RATING AGENCIES

Credit rating agencies assess a company, person, or entity, and assign ratings to them. These agencies have the right to examine or to businesses, government agencies, not-for-profit organizations in the country, the effects of local governments, and special-purpose bodies.

In the calculation of the rating, a lot of factors to consider, such as the financial statements, the types of debt, lending and borrowing history, repayment capability, past credit payment behavior, and many more. All of these factors make a certain contribution to the calculation of the final result is a rating. A credit rating agency does not provide any decision to financial whether an organization or entity should get a credit facility or not; it provides the report and additional inputs and making it easier for the lender to analyze and an informed decision.

WHAT IS A CREDIT SCORE?

A credit score is a three-digit number that summarizes your credit handling behavior in the recent past. The score depends on the information stored in the database of credit rating agencies such as CIBIL, Equifax, Experian, and many more. It ranges from 300 to 900. A low score states that an individual is poor in handling the finances on the other hand a high score shows that he can manage finances as well.

The ideal credit score is considered to be 750 or any score that is above 750 makes it favorable to get a new credit facility. The score computed by CIBIL is called CIBIL Score on the other hand the one which is computed by Equifax is called Equifax credit score. You should know that each rating agency has its own set of factors, which can have a significant impact on the shot.

DIFFERENCE BETWEEN CREDIT RATINGS AND CREDIT SCORE

The two terms are used interchangeably, in some cases; however, there is a big difference between them. A rating, expressed in the form of a rating is a letter that reflects the creditworthiness of a company or the government. A digital credit score, and also the expression of one's credit rating, can be used for individuals or small businesses.

Certain credit scores, for instance, the Dun & Bradstreet PAYDEX, Experian’s Intelliscore Plus, or the FICO Small Business Scoring Service applies only to businesses. The first use is on a scale of 0 to 100, while the last one a scale of zero to 300,123 rating Credit scores for individuals are range from 300 to 850.

A credit rating expresses the creditworthiness of a government or a business whereas a credit score is used to predict the likelihood that you will pay your credit obligations on time.
A credit rating is expressed in a letter grade format such as Triple-A ratings for those governments or corporations which have a healthy capacity for meeting all financial commitments followed by a double-A, A, Triple-B, Double-B, and so on, till D for default. Pluses and minuses also can be added to those ratings.
Credit scores are usually expressed in numbers on a scale of 300 to 900. The closer the score is to 900, the higher is the creditworthiness of that individual.

Both scores are, however, provided through independent third parties./

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