Credit Rating Agencies

Subject: Economy

Context:

Capital markets regulator Sebi gave fresh guidelines to standardise the usage of rating scales

used by Credit Rating Agencies (CRAs).

Guidelines:

The regulator has specified standard descriptors for rating watch and rating outlook.
‘Rating outlook’ indicates CRA’s view on the expected direction of the rating movement in the near to medium term.
- A stable, positive and negative are the standard descriptors to be used
‘Rating watch’ indicates a CRA’s view on the expected direction of the rating movement in the short term.
- Rating watch with positive implications, rating watch with developing implications, rating watch with negative implications are the three standard descriptors to be used.
Rating symbols should have CRA’s first name as prefix.
CRA will have to assign a rating outlook and disclose the same in the press release.

Credit Rating?

A credit rating is an assessment of the creditworthiness of a borrower in general terms or with respect to a particular debt or financial obligation.
A credit rating can be assigned to any entity that seeks to borrow money — an individual, corporation, state or provincial authority, or sovereign government.

What are Credit Rating Agencies?

A credit rating agency (CRA) is a company that assigns credit ratings, which rate a debtor’s ability to pay back debt by making timely principal and interest payments and the likelihood of default.
There are six credit rating agencies registered under SEBI namely, CRISIL, ICRA, CARE, SMERA, Fitch India and Brickwork Ratings.
CRAs were set up to provide independent evidence and research-based opinion on the ability and willingness of the issuer to meet debt service obligations, quintessentially attaching a probability of default to a specific instrument.
Evaluating the creditworthiness of an instrument comprises both qualitative and quantitative assessments, making credit rating far from a straightforward mathematical calculation.

Ratings:

‘AAA’ rating symbols–are considered to have the highest degree of safety regarding timely servicing of debt obligations. Debt exposures to such issuers carry lowest credit risk.
‘AA’ rating symbols -are understood to have a high degree of safety with regard to timely servicing of debt obligations. Debt exposures to such issuers carry very low to low credit risk.
‘A’ rating symbols– adequate degree of safety with regard to timely servicing of debt obligations
BBB rating symbols- are considered to have a moderate degree of safety regarding timely servicing of debt obligations. Debt exposures to such issuers carry moderate credit risk.
BB, B and C ratings- are considered to have ‘moderate’, ‘high’, ‘very high’ risk of default, respectively pertaining to timely servicing of debt obligations and issuers with D rating are in default or are expected to be in default soon.