A credit rating agency is in real terms a custodian of trust that has been reposed in them by investors after years of honest and correct reporting.
Importance of credit rating agencies can be gauged by the fact that maximum participation from retail investors has been seen from 2014-2016 as reported by Economic Times in December 2016.
Investors have reaped year-on-year returns at 12.9% for mutual funds. 14.8% for insurance and 12.5% for saving deposits. Gold continued to be the most favored asset class with current year investments going at 65.9 lakh crore in 2016.
The following tables support the data presented above and most of this research is done by credit rating agencies to give accurate information.
What is a Credit Rating Agency?
Credit rating agencies perform due-diligence in terms of evaluating the market position of the company within the industry it operates.
The legal constitution of the company as per the prospectus, its operating efficiency, accounting quality both of private and public sector organizations is measured by credit rating agencies.
Functions of Credit Rating Agencies
Credit rating agencies not only evaluate the credit-worthiness of an institution but also serve as business analysts who can evaluate industrial risks and classify the stock as high grade, upper medium grade, lower medium grade, non-investment grade speculative, highly speculative, substantial risk or default.
Deep drilling of financial statements shows whether the balance sheets have been prepared based on accrued income or realized income.
High grade investments are preferred by investors while those classified as default are best avoided; even though they promise a higher return on investment.
How Does Credit Rating Agency Work?
In order to deliver investors an unbiased view of an organization’s ability to repay debt, credit rating agencies evaluate the institution as carefully as possible.
The organization’s income as per cash in bank and not accrued income is taken into account.
Moreover, the existing debt levels of the company, in case it is not a zero debt company, willingness, character, and ability to repay the debt installments on time help in arriving at a conclusion.
What is a Credit Rate?
Credit rating agencies, assign letter grades to indicate ratings from AAA, AA+,B,C, D. Those having BBB- or lower ratings are labelled in financial terms as junk bonds. And hence not worthy of credit. The ultimate decision however lies with the lending institution.
Personal Credit Rating Agencies
Retail borrowers are now being bench-marked on a common credit score ranging from 0 to 900 that measure the credit-worthiness of an individual based on his past spending or borrowing habits.
Data of the previous seven years is taken into account by lenders before taking a lending decision regarding car, home or personal loans. Consumer Durable loans have less stringent Lending criteria and most people can avail them after paying the stipulated down-payment at the retail store itself.
What is a Good Credit Score Range?
Anyone with a score of 750+ out of 900 can easily get any kind of cards or loans without any hassle in the first attempt.
Rating Agencies Scale
AAA Highest safety
AA High safety
A Adequate Safety
BBB Moderate safety
BB Moderate Risk
B High risk
C Very high risk
Top 10 Credit Rating Agencies in the World: A Brief Snapshot
The top ten credit rating agencies in the world have been listed below. They are not listed as per ranks as everybody’s criteria is different when it comes to judging credit rating agencies.
You can obtain the list of credit rating agencies in your area through the internet and even get access to their contact number and email.
Most of these lists are not offered in any hierarchical or alphabetical order and all necessary details regarding their ownership structure, paid up capital, number of employees is given.
The following list of international credit agencies has been compiled purely on the basis of investor perception.
- Standard & Poor’s
- Fitch Ratings
- Egan-Jones Ratings Company
- A.M. Best Rating Services
- Japan Credit Rating Agency
- Rating & Investment Information
- European Rating Agency (ERA)
- Morning Star
Real World Examples/Illustrations
Credit rating agencies in India are only three decades old as the equity cult began taking momentum in 1977-78 when Dhirubhai Hirachand Ambani started offering regular returns to investors.
Trust in the system built up which was operating like a playground of international speculation. Most credit rating agencies warned him that he was riding a horse that he would not be able to unmount without being hurt. But Dhirubhai was adamant as banks had refused to lend him money so he turned to the public which rewarded him with enormous wealth.
At this juncture, it is important to know that the role of international credit rating agencies is not limited to rating companies and publishing them but also help in informed decision making so that investor wealth increases.
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All those who are in a position to invest do so in multiple asset classes like debt, equity, gold, real estate. And more than four times the money that is deposited with banks is circulating in daily transactions between buyers and sellers of goods and services.
The government which tried to demonetize currency and shift transactions to electronic mode only ended up creating more chaos but made banks slush with cash.
Though Credit rating agencies in USA downgraded India as an investment destination. This is natural and even Reliance industries when they launched their telecom business in 2003 were downgraded.
Even before the elections of 2014, India was given “junk” status as credit rating agencies factored in the possibility of a hung parliament in case there is a fractured mandate. But that never happened and the right-wing conservatives attained absolute majority defeating leftist, liberals and pseudo-liberals in the opposition.
“Wrapping it Up”
One must remember that the basic duty of a credit rating agency is to inform and alert lenders about a company’s ability to repay debt.
The ratings offered are always taken with a pinch of salt as high ratings given to most companies in 2008 proved worthless as most of these companies crashed triggering a worldwide recession that hasn’t really withered away and rears its head through double-dip recessions every few months.