Credit ratings are quite fundamental to the financial system, more so in countries like India, as an indicator of the entity’s ability to honour its borrowing. It is important to note that whenever an investor or any other stakeholder considers a credit-rated company, a government body or a financial instrument, they are presented with a credit rating, which is more of a yardstick on the chances of the said borrower repaying the loan taken.
Credit ratings and their functioning are imperative for both the issuers and investors in the market.
What is a Credit Rating?
In layman’s language, a credit rating can be defined as a measure that constitutes a score that is attached to an entity or financial instrument, which outlines the chances of default on the instrument. These ratings are assigned by rating agencies that consider several factors, including the present status of the entity, repayment history, and present economic conditions, among others.
As such, the rating indicates to potential creditors whether the particular entity can be lent money with heavy risks attached or with little risks. Credit ratings can be comprehensive. For example, a high rating means the chances of repayment of the loan given are minimal, or a low rating indicates higher risk.
In India’s financial sector, one will find the Credit Rating Agencies reviewing inflows in the form of corporate bonds, government securities, and even relatively smaller tools like fixed deposits. For businesses, access to a good credit rating implies cheaper costs of borrowing and relaxed market entry whereas poor rating may hinder raising of funds or result in expensive borrowing rates.
Credit Ratings are quite useful in determining the Tier or Band of the Rating for the rated instrument. Terms such as ‘AAA’, which denotes the highest Grade of credit rating, suggest a low risk of default. The ratings take a hierarchy where the lowest rating, D, is associated with the highest risk of default. The entity is rated based on several qualitative and quantitative factors, such as its revenue sources, debt burden, etc.
Improvement or maintenance of credit ratings requires judicious control of finances and other management practices. While some organizations may settle for having poor credit ratings due to a lack of actions, being downgraded is an important objective. Improvement of financial figures such as profitability, liquidity and debt ratios will positively impact credit ratings over the years, resulting in lower borrowing costs.
Need for Such Credit Rating Advisory Services
These services are so critical for companies that they intend to either upgrade their credit ratings or maintain them at a favourable level. These are general management services geared towards strengthening the financial base of a company. Professional advisors assist in underlining the weaknesses in the capital structure of an entity to offer various ways to improve its rating, either by restructuring the debt, curtailing expenditures or enhancing the efficiency of the cash management system.
Such credit rating advisory services help businesses not only in credit rating improvement but also facilitate credit ratings preparations along with investor relations and regulatory enforcement. Working closely with these advisors enables the companies to improve their situational batters to get good ratings and better terms of borrowing.
Significance of Credit Ratings for the Indian Economy
In India, credit ratings also assume a greater pace in this context. With the developing corporate bond market and dependence on the external environment getting deeper, it has become a regulatory requirement for businesses to maintain a good rating. In addition, since more retail investors are now enthusiastic about the fixed-income segment, they also require credit ratings for investment purposes. If a country has a good rating system, it creates an atmosphere of trust amongst the population, making them confident and willing to invest.
Conclusion
Credit ratings play an important role to business entities and investors alike in terms of the level of credit and making investment choices. Companies, for their part, recognize that for them to access cheap credit for business expansion, credit ratings must either be sustained or raised. Credit rating advisory services have been structured in a way that allows organizations to make decisions that would lead to an improvement of their credit rating and thus remain economically viable. One must grasp this aspect of credit ratings to play the game of the financial basket in India well.
