Credit rating is the rate of the rating company on the ability and finance position as well as history finance position to pay off the debts. Credit rating estimates all the finance position such as assets and liabilities, balance sheets, long terms assets and liabilities, debt-equity ratio and past of the company to pay the debts. With all these financial instruments, credit rating company gives the rating to the company of which it is rating and tell the investors as well as lenders about the financial position with it’s rating. Like normally credit rating gives company point 1 to 5 and 5 indicates that company has sound financially position whereas 1 indicates that company has poor financial position. This will surely help the investors and lenders to know the finance position to pay off debt and money they are investing in.
Credit Rating Company only indicates the investment instruments and not the whole of the company.
The company who rates the company is called CREDIT RATING AGENCY (CRA).
There are four main Credit rating agencies in India.
1- CRISIL(credit rating information and services of India limited)
2- CARE(Credit analysis & research)
3- ICRA(Investment information and credit rating agency of India limited)
4- Fitch ratings
Who needs credit ratings: - the main question is who needs credit rating. Government of India ensures that any company which is going to public for initial public offer is needed to get the credit rating first. Also government is ensuring that all the big companies must have credit rating to tell the investors about the financial position. The main sectors or companies which needs credit ratings are;-
1- Commercial banks.
2- Investment banks.
3- Mutual funds
4- Leasing companies
5- Insurance companies
6- Bond issuers
7- Any company which is going to public for initial public offer
8- Any company which needs loan from banks of a higher amount(app. 2 crores or more)
Rating method: - some certain method is used to rate a company or financial institution. The following factors are used to determine the credit rating by credit rating agency.
2- industry risk
3- market ups and down
4- cash flows
5- fund flows
7- performance in past years
8- management structure
9- capital and debt structure
10- corporate governance
11- debt equity ratio
12- other factors
Rating agency gives the rating on the point of time in which the rating is done. The rating can be changed as the pass of time with change in enviourment, change in government policies, change in management or any changes happens with the passage of time. So credit rating agencies issue the guidelines to the financial companies as well as other companies to make their rating according to time. However, there is no policy of government to re-rate the companies in some years or month. But it’s essential for telling the better and correct information to the investors
.Credit rating agency also used the words AAA, AA, BBB, CC or 1 to 5 to rate the companyCredit information bureau of India limited (CIBIL) plays a vital role to the banking and financial companies to rating system in India. It was commenced in 2000 and it makes guidelines and issue different rules of rating to credit rating agency in India.Benefits to credit rating: - there are many benefits of rating system.For corporate:- for corporate the basic benefits of rating system is that if they have good rating, they can easily get loans with less rate of interest and also get a good goodwill.
Investors: - investors can invest their money in highly rated company as in highly rating company there are less chances of loosing the money.
Credit rating funda:- the credit rating is in initial stage here in India and companies always try to get good rating by giving bribes or by anything to rating companies and in most of the time, the companies are successful in getting high rating. This truth has come in open in the financial crises 2 years ago when good rated companies turned to zero. So sebi and reserve bank of India (RBI) make some measures to give the rating the companies. These measures are as follows.
- Make a default formula in computing interest of bond issuers.
- Credit agency makes a default recognize the parties which delays paying interest or principal of any loan.
- Credit rating agency need to ensure that the analytic and the revenue department work differently and there is nothing for fees, charge etc work for the analytic. The analytic work is to check all the records and give report that’s all.
- There should be a default pre planned rating system to give the rate of that financial position.
- Credit rating agencies need to disclose the fees and charges they charged to that company in giving the rating.
- Credit rating agency need to maintain the records on which behalf they have given rating to different companies.
- Credit rating agency must disclose if they have any relation to the company they are giving rating or any past business or any kind of interaction.
Conclusion: - credit rating is very good to the investors as well as to corporate sector so as to economy if it works rationally. But if the corruption and bribes get into it, it is more harmful than beneficial. So government should look into the matter and make the rules of credit rating so hard that no corruption can come into being a good financial structure.
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