CREDIT RATING


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Uploaded on May 4, 2020

Category Business

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CREDIT RATING

CREDIT RATING RAHUL AGARWAL CREDIT RATING Credit Rating is an assessment of the borrower (be it an individual, group or company) that determines whether the borrower will be able to pay the loan back on time, as per the loan agreement. A good credit rating depicts a good history of paying loans on time in the past. This credit rating influences the bank’s decision of approving your loan application at a considerate rate of interest. CREDIT RATINGS IN INDIA As a matter of fact, every credit rating agency has their algorithm to evaluate the credit rating. However, the major factors are credit history, credit type and duration, credit utilization, credit exposure, etc. Every month, these credit rating agencies collect credit information from partner banks and other financial institutions. CREDIT RATING AGENCIES IN INDIA ● CRISIL ● ICRA ● CARE ● ONICRA ● SMERA ● Brickwork Ratings India Private Limited CREDIT SCORE A credit score is a review of a user’s credit report, and through advances, analytics turns the data into a 3-digit number representing the amount of risk the individual brings to a particular transaction. Credit score values range from 300 to 900. CREDIT SCORING MODEL Credit Information Companies (CIC) typically build scores using three historical data files: ● Defaults on previous credit transactions. ● Payment behaviour/ Payment history. ● Previous searches/ inquiries. CREDIT UTILIZATION Effective credit utilisation is a significant step in an individual’s credit score. If a person’s safe limit is INR 10,000 and only used INR 5,000, then the person is considered a very reliable customer. PAYMENT DEFAULTS Rating agencies assess the credit risk of specific debt securities and the borrowing entities. In the bond market, a rating agency provides an independent evaluation of the creditworthiness of debt securities issued by governments and corporations. PURPOSE OF CREDIT RATING AGENCIES Credit rating agencies assign ratings to any organization that issues debt instruments, including private corporations and all levels of government. Due to the fact that investors need to know they are receiving adequate compensation for the risk they are taking by holding an investment, the ratings the agencies issue are essential to the financial industry. ADVANTAGES 1. They Help Good Institutions Get Better Rates 2. They Warn Investors of Risky Companies 3. They Provide a Fair Risk-Return Ratio 4. They Give Institutions an Incentive to Improve DISADVANTAGES 1. Evaluation Is Highly Subjective 2. There Can Be Conflict of Interest 3. Ratings Aren’t Always Accurate GOOD CREDIT SCORES 1. Evidence of financial discipline. 2. If the borrower has defaulted payments once or twice due to reasons beyond their control, those will show up as clear aberrations in overall consistent payment history. 3. The longer the credit history, the better. The lender’s assessment presumable improves as he gets more significant spans of repayment. One should be cautious about closing old accounts and opening new ones. WHY TO USE CIR? ● It helps in analysing one’s right financial standing and make plans for future finances. ● One can be on top of their borrowing and avoid debt traps. ● With a Credit Information Report in hand, he or she will be in an excellent position to make decisions concerning availing new forms of credit, while also being able to extract the best possible rates from banks or lenders. ● It helps in cultivating financial discipline. THANK YOU