CREDIT RATING AGENCY IN INDIA: NEED FOR REGULARISING IT by - Pratik Madrecha

INTRODUCTION

Rating agencies are key players in the financial system. They provide independent assessment on

the creditworthiness of debt issuers to make an informed decision in the financial markets. The

rating agencies have considered as the gatekeepers of financial and capital market, which is a

position of considerable power and influence. The rating agency affects the ability of a company

to borrow money. It also affects a pension fund, or a money market fund investment in a

company's bonds, and their stock price in the market. 1 Credit rating agencies (CRAs) plays an

important role in financial markets for lenders, investors and issuers in providing the information

between the different parties. It analysis the credit capability of individuals in a country. When

all the investors are positively rated, then there will be an increase in new start-ups.

Gradually income of the country increases, Employment opportunities expands and Poverty

ranks less. When there is development in all the sectors then the GDP increases and country

develops. Service sector is an important sector that majorly contributing to country’s

development. Credit rating comes under financial services, as it provides financial security with

their ratings. Presently, credit rating represents one of the most significant financial issues due to

the recent economic crises. The role and importance of credit rating agencies have increased in

the recent years of the globalisation all over the world.

IMPORTANCE OF CREDIT RATING

A good credit rating depicts a good history of paying loans on time in the past. This rating by the

agency affect the bank’s decision of approving your loan application at a considerate rate of

interest. 2

The benefit of the credit rating agency can be briefed as

I. FOR THE MONEY LENDERS

a. Better Investment Decision: No bank or money lender companies would like to give money

to a risky customer. With credit rating, they get an idea about the credit worthiness of an

individual or company borrowing the money with the factor of risk attached. Through the

evaluation of rating, an efficient decision can be made.


1 Rating the Raters, “Enron and the Credit Rating Agencies: Hearing Before the Senate Comm. on Governmental Affairs”, 107th

Cong. (2002).

2 Rheas Fonte, “Enhancing the Transparency of Japanese Financial Laws: the Case of Oversight of Credit Rating Agencies” The

Japanese Yearbook of International Law, Vol 12 (2010) 53.


b. Safety Assured: it assures about the money safety to the person going for the money lending

and paying back of the interest of the money on the time.

I. FOR BORROWERS

a. Easy Loan Approval: With high credit rating, you will be seen as low/no risk customer.

Therefore, banks will approve your loan application easily.

b. Considerate Rate of Interest: You must be aware of the fact every bank offers loan at a

particular range of interest rates. One of the major factors that determine the rate of interest

on the loan you take is your credit history. Higher the credit rating, lower will the rate of

interest. 3

HOW DO CREDIT RATINGS WORK IN INDIA

The credit rating agency has their algorithm to evaluate the credit rating. However, the major

factors to be taken into consideration by the credit rating agency are the credit history, credit type

and duration, credit use, exposure of credit, credit pay back etc. Every month, these credit rating

agencies collect the information which has credit effect on the investment from partner banks

and other financial institutions. When the person request for credit rating has been made, these

agencies take out their information and prepare a small summary based on such factor. On the

basis of the summary they grade every individual or company and give them a credit rating. This

rating is also used by the banks, NBFC and investors to take a decision of investing money,

buying bonds or providing loan. The better is the rating is being made, there is more chances of

getting money at payable interest rates.


CREDIT RATING AGENCIES IN INDIA

3 Jonathan Katz, Emanuel Salinas, and Constantinos Stephanou, ‘Credit Rating Agencies: No Easy Regulatory Solutions’, Crisis

Response, Vol. XX 8 (2009).


Credit rating agency is an organization that evaluates the credit worthiness of an individual,

business or company who wishes to borrow money or apply for a credit card in the bank. Let’s

have a look at the credit agencies in India. 4

I. CRISIL

Credit Rating Information Services of India Limited is the first credit rating agency of the

country which was established in 1987. It rates companies, banks and organizations, helping

investors make a better decision before investing in companies’ bonds. It also calculates the

credit worthiness of companies based on their strengths, market share, market reputation and

board. It offers 8 types of credit rating which are as follows:

 AAA, AA, A – Good Credit Rating

 BBB, BB – Average Credit Rating

 B, C, D – Low Credit Rating

II. ICRA

Investment Information and Credit Rating Agency of India was formed in 1991 having

headquartered in Mumbai. It offers comprehensive ratings to corporates via a transparent rating

system. Its rating system includes symbols which vary with the financial instruments. Here are

the types of credit ratings offered by ICRA like Bank Loan Credit Rating Corporate Debt Rating,

Corporate Governance Rating Financial Sector Rating, and Issuer Rating Infrastructure Sector

Rating etc.

III. SMERA

Small Medium Enterprises Rating Agency of India Limited has two divisions – SME Ratings

and Bond Ratings. It was established in 2011 and is a hub of financial professionals. It offers

credit ratings in the following format:

 AAA, AA, A – Low Credit Risk

 BBB, BB – Moderate Credit Risk

 B, C – High Credit Risk

 D- Defaulted

JUDICIAL APPROACH TO RATING AGENCIES LIABILITY

The judicial authority in India consider as rating services as contract under section 10 of the

contract act. 5 It provides by credit rating agencies at the invitation of companies or businesses


4 Ministry of Finance, Capital Markets Division, Report of the Committee on Comprehensive Regulation for Credit Rating Agencies,

12 (2009.)


against realisation of fees for rating and surveillance. It is entered into at the invitation of the

concerned company. The rating of financial programmes and instruments was optional for non-

banking finance companies till December 1997. However, since January 1998 the Reserve Bank

of India has made it compulsory for non-banking finance company to have the same rated.

Although the Reserve Bank of India has made it compulsory for non-banking companies to

engage a rating agency, such non-banking finance company is not obliged to engage the services

of any particular agency and is not prevented from engaging the services of more than one

agency at the same time. 6

 In magma leasing case, the plaintiff entered into a contract with a different rating agency being

Credit and Analysis Research Limited for rating its programme. Ultimately, the plaintiff

informed the defendant that it had decided not to either accept or use the respondent's credit

rating and asked the defendant not to continue the purported rating of the plaintiff or to publish

the result thereof.

Under such circumstances, the plaintiff cannot be forced to accept the rating of the defendant

even though it has made allegation of bias of the defendant towards non-banking financial

companies. 

Therefore, if the plaintiff decides to take assistance of another recognized rating agency in place