Primer on Credit Rating Scales - vrk100 - 10Apr2022

Primer on Credit Rating Scales

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You may have observed several companies advertising in newspapers and claiming they have 'AAA' or 'AA' rating for their deposits. For example, Bajaj Finance Limited's invitation to offer claims 'AAA' rating for its deposits, while Muthoot Finance claims 'AA' rating for its deposits.

Similarly, companies too will be offering their debt instruments (like, bonds, debentures, etc.) to select investors when companies raise money from capital markets. These debt papers will be having credit ratings ranging typically from 'AAA' to 'D.'

A credit rating is an evaluation of a company's ability to repay its loans and other financial obligations. These ratings are given by credit rating firms based on the financial strength of companies and their ability to repay principal and interest of the debt instruments. 

Credit ratings may also be done for fund-based bank facilities, like, working capital loans, term loans for equipment finance; and for non-fund based facilities, like, letters of credit and bank guarantees.

As of now, there are seven registered credit rating agencies in India as per Securities Exchange Board of India (SEBI), India's capital market regulator:

 

Crisil Ratings Ltd, 

ICRA Ltd, 

Care Ratings Ltd, 

India Ratings & Research (ex-Fitch Ratings), 

Brickwork Ratings India, 

Acuite Ratings & Research, and 

Infomerics Valuation & Rating

 

Short term debt rating is for instruments with a maturity of upto one year and long term debt rating is for maturities above one year. 

 

Typical credit rating scale (Long term debt):

 

 Please click on the image to view better >

The terms highest safety, high safety and safety shown in the above table are on a relative scale. For example, Crisil Ratings has recently given a rating of Crisil AAA/Stable for Marico Limited's long term debt instruments. Here, 'AAA' indicates highest safety as regards repayment of principal and interest.

Likewise, MSTC Limited received a rating of Acuite A+/Stable from Acuite Ratings & Research last year. Here, 'A' indicates adequate safety with regard to repayment of principal and interest.

'AAA' indicates top rating and 'D' signifies lowest rating in the above table. In addition, the credit rating firm giving the rating may add its own name or other symbol to differentiate the firm's rating from another firm's rating. 

For example, India Ratings & Research had recently given a long-term rating of IND AA+/Stable for Tata Steel's non-convertible debentures (NCDs). Here, 'IND' indicates the credit rating is from India Ratings & Research; AA+ indicates rating and 'Stable' shows the future outlook.

 

Likewise, ICRA Limited may prefix 'Icra' to its ratings.  

 

 

Typical credit rating scale (Short term debt):

 

Please click on the image to view better > 

P.S.: A company is having a credit rating of say, AAA-/Stable--this will be pronounced as 'Triple A" minus with stable outlook. Likewise, another company's A+/Negative rating will be pronounced as 'Single A' plus with negative outlook. 

P.S. dated 31Oct2022: SEBI Circular dated 31Oct2022 - Standardisation of Rating Scales Used by Credit Rating Agencies (CRAs)

 

- Standard descriptors for Rating Watch and Rating Outlook 

 

- Rating symbols and definitions

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References:

Crisil Ratings scales 

Credit Rating scale

ICRA Rating scale

Mapping of ICRA Limited's long and short term ratings

Mapping of Crisil Ratings' long and short term ratings

Crisil wrt recognising default

Disclosure:  I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.

Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets. 

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