FAQs ON CREDIT RATING
1.
What
is the full form of CRA?
The full form of CRA is Credit Rating Agency.
2. What is a 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.
3. How is a rating denoted?
Rating is denoted by a simple alphanumeric symbol, for e.g. AA+, A-, etc.
4. Whether the issuer company is
rated or the instrument?
The rating is assigned
to a security or an instrument.
5. What does credit rating convey?
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.
6.
How is credit rating done?
Ratings are based on a comprehensive evaluation of the strengths and weaknesses of the company fundamentals including financials along with an in-depth study of the industry as well as macro-economic, regulatory and political environment.
7. What do the various rating symbols mean?
Each rating symbol is an alphanumeric representation of the probability of degree of repayment risk associated with debt instruments.
8. Are
rating symbols the same across all types of debt instruments?
No. Rating symbols may vary depending on the type of debt instrument, as for example long term or short term.
9.
What
do the “+” and “-”sign indicate in a rating?
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+‘.
10.
What are investment and speculative grade ratings?
An investment grade rating signifies the
rating agency’s 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.
11. Who pays for the credit rating?
In
12. Who regulates rating agencies?
Credit rating agencies are regulated by
SEBI. 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.
13. Does SEBI have a role in the rating
exercise?
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.
14. Is rating a one time exercise?
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.
15.
Why do ratings change?
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.
16.
What
does a rating downgrade indicate?
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.
17.
What kind of responsibility or
accountability will attach to a rating agency if an investor, who makes his
investment decision on the basis of its rating, incurs a loss on the
investment?
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.
18. Do agencies rating small and medium
enterprises, mutual funds, banks, non-banking financial institutions, insurance
providers, infrastructure entities, etc. also fall under the regulatory purview
of SEBI?
No, SEBI regulates
only the agencies which are engaged in the business of rating securities
offered by way of public or rights issue.
19. From where can the credit ratings of instruments
be obtained?
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.
20. What are the common factors that are taken into
account while awarding the credit rating?
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.
21. How can
an investor know if a credit rating agency has changed its rating?
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.
22. What are the measures taken by SEBI in
strengthening credit rating?
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.
23. Why
there are not common symbols for credit ratings of all agencies?
The credit rating
agencies do not have common symbols because they use different rating
methodologies and have different factors bearing different weightage.
24.
Which
are the rating agencies registered with SEBI?
|
Name of the
rating agency |
Information |
|
Credit
Analysis & Research Ltd. ( |
4th Floor,
Godrej Coliseum |
|
ICRA Ltd. |
1105, |
|
CRISIL Ltd. |
CRISIL House |
|
Fitch Ratings |
Apeejay House,
6th Floor |
|
Brickwork
Ratings |
#39/2,Sagar Complex,2nd
Floor |