A credit rating is a grade given to a bond by a credit rating agency that helps in understanding whether the issuer of the bond i.e the company is financially sound or not.

The rating agencies evaluate the ability of an entity to fulfill all its obligations to the bondholders within the predetermined time period. The rating agency could be a government, a corporation, or an individual. The primary reason for assessment done by a credit rating agency is to determine the possibility of a debtor defaulting. It equally represents the credit risk associated with debt instruments whether a loan or a bond.

The process of evaluation is done by analyzing the information provided by the debtor through its financial statements, annual reports as well as other sources such as industry analysis, published articles, and other projections. All credit rating agencies in India are regulated by the Securities and Exchange Board of India.

Ratings are bifurcated into two groups: investment-grade ratings and non-investment grade ratings:

Bonds with investment-grade ratings are considered to have high creditworthiness. While bonds with a high probability of the issuer defaulting are called non-investment grade bonds. However, Non-investment grade rated bonds provide higher interest than investment-grade bonds to compensate for the higher rate of risk.

Credit ratings are typically used by multiple entities namely investors, investment banks, issuers of debt, corporations to understand the financial health of the bond issuer. Let us take a deeper look at how each entity analyses credit ratings for their perusal.

Investors- Both institutional and individual investors use credit ratings to evaluate the risk associated with debt securities.

Investment banks- Investment banks use credit ratings to measure the risk associated and price the securities

Debt issuers- Issuers of debt use credit ratings to get an overview of the securities. It helps them to get a glance at where they stand in the market and what returns they could expect from the securities issued.

Businesses and Corporations - Corporations that are looking to evaluate the risk associated with other parties involved in the transaction also use credit ratings. For example, A purchaser of an asset will evaluate the ratings of the seller who is looking to sell the asset and vice versa.

Some top-rated credit rating agencies in India are:

Credit Rating Information Services of India Limited (CRISIL)

Investment Information and Credit Rating Agency of India Limited (ICRA)

Credit Analysis and Research Limited (CARE)

Brickwork Ratings (BWR)

India Rating and Research Private Limited

Acuite Ratings and Research Limited

Infomerics Valuation and Rating Private Limited

Just like a credit score helps in evaluating an individual’s credit health, in regards to bond issuances, the credit rating gauges the worthiness of the corporation or government’s ability to repay the bond payments on time.

It is always advisable to take guidance from experts before making any investment decision regardless of the credit ratings provided. Bondskart has a team of experts to guide you in every step of your investment journey to ensure you make an informed decision.