The Power Players Of Finance – Credit Agencies

SYNOPSIS

In the evolving landscape of India's financial markets, Credit Rating Agencies such as CRISIL, ICRA, and CARE Ratings play a pivotal role as trusted evaluators of risk. Their ratings, spanning from AAA to D, significantly impact interest rates, investor choices, and the reputations of borrowers, influencing the flow of capital across various sectors. Despite their unsung status, these agencies are the backbone of trust in the Indian financial system, empowering stakeholders with the insights needed to thrive.

Discover how credit rating agencies silently shape global finance and influence major economic decisions.

CRAs, considered an ultimate symbol of trust and known to set and ascertain the risks in any transaction in the financial markets. Such rating agencies include CRISIL, ICRA, and CARE Ratings. They give their rating to bodies such as corporates and governments to structured finance products. These ratings-Aaa, BBB, D-are more than just ratings; they convey the effects upon the rate of interest money can be borrowed at, choice of investor, and reputation in the financial markets.

Historically, credit rating agencies in India have operated in a very constrained manner, but more recently the industry has undergone extensive changes. The rating of securities covers practically any area in the economy which is funded through capital markets and lies inside or beyond the confines of the regulatory framework. Investors require these ratings as they help in ascertaining the risk associated with a certain debt. Insurance companies, mutual funds, banks, and NBFCs will adhere to these ratings as far as mitigating credit risk for their compliance and regulatory framework. Ratings to determine whether the borrower has the capacity to repay the loan; downgrading can make lending more difficult, whereas a higher rating can make lending easier with lower interest rates; corporations use higher ratings to lower the cost of capital and raise funds more efficiently. Price regulators incorporate credit rating in their capital adequacy framework, considering risk weighting, and set investment limits.

The bureau operates alongside CRAs, with CIBIL, Experian, and Equifax keeping credit histories of individuals and small businesses. They affect decisions related to MSME funding and personal credit cards by granting credit scores. With deep domain knowledge and regulatory monitoring under SEBI, CRISIL (S&P Global), ICRA (Moody's), and CARE Ratings stand as the premier agencies in India.

Credit rating agencies assign ratings to various industries. This is due to the fact that every industry has unique risks and regulatory frameworks. For instance, asset quality, capital adequacy, and liquidity are the main factors that determine banking ratings. Capital expenditures, lengthy project cycles, and reliance on governmental regulations are the main factors considered in infrastructure ratings. Manufacturing ratings look at competition, price volatility of raw materials, and operational efficiency, while real estate ratings come from considerations of project execution and market cycles. NBFC ratings, on the other hand, consider asset-liability mismatches and the diversity of sources of funds. The investors should appreciate these peculiarities of an industry as to be able to value the risks and opportunities that unfold before them.

Finally, alternative scoring models, fintech integration, and ESG ratings have pushed agencies to go for the more tech-driven and inclusive approach. Nowadays, they need to be, in fact, a necessity in improving investor confidence, in risk management, and in property access. 

Credit rating agencies are like the arch villains, albeit unsung, in the Indian financial system. By providing a disinterested and expert opinion on credit risk, they bring transparency, discipline, and confidence to the entire organization.

Pranav Shah