Credit ratings are independent ratings that assess the capability of any institution (government or private) to repay debt, thus making them an important part of any economy. You must have already heard about credit scores that showcase an institution or individual's history of taking and repaying debt. Credit ratings and credit scores are two major factors that impact the capital market. These ratings are used to assess the situation where credit can be offered.

Credit rating agencies are independent agencies with an algorithm to assess the capacity to repay debt by reading cash flow, time taken to repay, net worth, working capital, and similar factors. These agencies play a vital role in deciding where the money in the market goes by providing a green signal. The higher the rating, the greater the chance of acquiring capital. What makes them reliable and vital to the capital market is that they collect data every month to stay updated.

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Multiple entities in the capital market provide credit ratings and work as credible agencies. Here’s a list of credit rating agencies in India that play a pivotal role by providing credit ratings in the capital market.

• Credit Rating Information Services of India Ltd. (CRISIL)
• India Ratings and Research Pvt. Ltd.
• INFOMERICS Valuation and Rating Private Ltd.
• Acuité Ratings & Research Ltd.
• Credit Analysis and Research (CARE) Ltd.
• Investment Information and Credit Rating Agency of India (ICRA) Ltd.
• Brickwork Ratings India Private Ltd.

Credit ratings are a result of independent assessments done on an entity’s financial portfolio, focusing solely on its capability to repay debt. These ratings are offered by independent credit rating agencies that conduct comprehensive research and produce a detailed report that becomes a vital factor in deciding where the money flows.

There are different types of credit ratings in India, including:

• Corporate ratings
• Sovereign ratings
• Municipal bond ratings
• Bank loan ratings
• Structured finance ratings

Now that you have understood how capital ratings work, let us learn the importance of credit ratings in capital markets:

• Ensures informed decisions
  The capital market works on money lending and debt repayment. No institution wants to lend money without knowing the chances of getting it back. Credit ratings help make informed decisions by acknowledging the risks attached to such loans.

• Assures safety
  A higher credit rating indicates the reliability of an individual or institution in repaying the money, assuring the lender before sanctioning the loan.

Benefits of credit ratings to investors

Investors in the Indian capital market come in with huge pockets looking for a promising opportunity. Credit ratings help them better evaluate a business's present and past to predict the future and understand whether they should get in or stay put. Additionally, while buying bonds issued by a business or entity, these ratings support investors in making an informed decision to understand their chances of being compensated.

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Benefits of credit ratings to issuers

Here’s how credit ratings help issuers in the capital market:

• Access to a broader investor base
  While investors rely on credit ratings to identify potential opportunities, this helps issuers with credible ratings to get access to a wider investor base, including international investors.

• Lower borrowing cost
  A higher credit rating means lower risk attached to investors while offering capital, which in turn lowers the interest rates and borrowing costs for issuers.

• Improved capital planning
  Credit ratings provide detailed insight into an issuer's profile, helping them to make improved capital planning.

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Benefits of credit ratings to financial intermediaries

Credit ratings work for the benefit of financial intermediaries in the following ways:

• Risk assessment and profile management
  Financial intermediaries like banks and investment brokers rely heavily on credit ratings to evaluate borrowers' repayment potential and easily maintain detailed portfolio charts.

• Informed advice and recommendations
  Financial intermediaries are also responsible for client advisory, and with insight into the client's portfolio through credit ratings, offering valuable recommendations and financial planning suggestions becomes easier.

Benefits of credit ratings to regulators

Regulators in the capital market are solely responsible for evaluating the risks of every player in the market, including investors, financial intermediaries, and borrowers. Credit ratings help facilitate transparency, which translates into ease in regulating the market. With detailed insight into the capital market, regulators can easily track every movement in the market.

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Here’s how you can use credit ratings to your advantage before making any investment decision:

• Evaluate the scope
  Credit ratings solely evaluate the entity’s capability to repay debt and do not focus on risks like market volatility.

• Research on the credibility of CRAs
  While credit rating agencies work independently, you must look into the reputation of the agency before relying on its ratings.

• Look beyond ratings
  As a smart investor, you shouldn’t base your investment decisions solely on one factor. Learn more about the company and conduct due diligence.

Conclusion

Credit ratings in the capital market serve as indicators to potential investors regarding an entity's capability to repay debt. Credit rating agencies like CRISIL and ICRA assess a business’s financial portfolio before providing their ratings, which helps issuers, financial intermediaries, and investors. Thus, the role of credit ratings in the capital market cannot be overlooked, and these agencies collect data every month to ensure the information remains updated.