Understanding Credit Rating for Businesses in India

April 13, 2024
credit rating in india

Quick Summary

  • Unlocking the potential of your business begins with understanding credit ratings in India.
  • This comprehensive guide delves into the intricacies of credit ratings, from the difference between investment and speculative grades to the factors influencing your company’s rating.
  • Discover the benefits of maintaining a positive credit rating, such as easier access to financing and stronger supplier relationships.
  • Learn practical tips to keep your credit rating high, including managing debt and working with top credit rating agencies like CRISIL and ICRA.
  • Elevate your business savvy with this essential knowledge!

Table of Contents

Welcome to the world of credit ratings! A good credit rating is essential for securing financing and investments. Lenders and investors look at your credit rating to determine if you are a reliable and trustworthy borrower.

Additionally, a good credit rating in India can help you get better terms and interest rates on loans. So, it’s important to maintain a good credit rating to ensure that your business can access the capital it needs to thrive!

Unless you’re an experienced financial expert, it can be a tricky terrain to navigate. But don’t worry – this guide post will help you understand all the nuances of credit rating in India. At the end of the post, we’ll provide quick tips that you can use to make sure your business’s credit rating stays in good shape. Join us and take the first step towards mastering the world of credit rating in India!

What is a Credit Rating?

Your credit rating is an indicator of your financial risk for credit rating agencies. They assess your business and finance risk and other factors such as your ability to repay debt to give you a rating.
This rating can then be used by lending entities to determine how much of a risk you pose. There are two types of credit rating in India:

Investment Grade

Investment grade ratings indicate that the investment is reliable and the issuer is likely to fulfill repayment obligations. These investments are usually priced lower than speculative-grade investments.

Speculative Grade

Speculative-grade investments are high-risk investments that come with higher interest rates.

Difference Between a Credit Rating and a Credit Score

People tend to use the two terms interchangeably. The table explains the crucial difference between credit rating and credit score so that you don’t get confused.

Credit Rating  Credit Score 
Credit ratings are assigned to corporate/government entities Credit scores are assigned to individuals. 
These are alphabetical codes that range from AAA to D These are three-digit-long numeric codes that range from 300-900
Credit ratings are looked at by stock market investors, other businesses, and investment banksLenders and potential guarantors look at credit scores

Factors Considered in Credit Rating in India

Major factors that affect the credit rating process in India:

Company’s History

The credit rating agency takes a close look at your company’s past when it comes to taking loans and making repayments. If you’re not up-to-date on payments, your credit rating can take a major hit.

Loan Portfolio

The type of loans a company is servicing matters. If the company’s more focused on paying off secured loans, it’ll have a better credit rating overall. On the flip side, if the majority of the loan portfolio is made up of unsecured loans, it could take a toll on the rating.

Company’s Future Potential

A company’s potential future performance is taken into account when determining its rating. If the projections and current results look good, they’ll get a positive rating. If not, they’ll get a negative one.

Benefits of Business Credit Rating in India

Having a positive business credit rating offers various benefits to a company. A positive credit rating isn’t merely a statistic – it’s a pragmatic tool unlocking an array of opportunities.

1. Personal finances are kept separate from your business finances

A separate credit profile streamlines financial management, allowing businesses to monitor cash flow, expenses, and credit usage without the complications of intertwining personal finances. Having a business credit score can help you access credit for your business without leaning on your own personal credit. A clear distinction between personal and business finances simplifies tax filing. Deductions, expenses, and income related to the business can be accurately reported. This separation ensures financial integrity and clarity in tracking transactions. Also, In the event of business debts or legal issues, personal assets are generally safeguarded.

2. Access to Financing

In the dynamic landscape of business, securing financing is often a critical need. A positive credit rating can transform this challenge into an opportunity. A higher credit rating increases the likelihood of loan approval and may result in more favorable terms, such as lower interest rates.

3. Supplier Relationships

A positive credit rating instils confidence, fostering positive relationships. Suppliers, eager to do business with reliable partners, are more likely to offer favorable payment terms and increased access to goods and services.

4. Competitive Advantage

In the competitive marketplace, trust is a valuable currency. A strong credit profile sets businesses apart, signaling reliability and trustworthiness. This positive perception becomes a competitive advantage, attracting clients, investors, and collaborators.

5. Insurance Premiums

Insurers often consider a company’s credit history when determining premiums. A positive credit rating can result in lower insurance costs, contributing to overall cost savings.

Earn Online with Chegg No Investment Required

How to Maintain a Good Credit Rating

It is essential to maintain a good credit rating in India, It helps you to avail of business loans from NBFCs and other financial institutions. By following a few simple steps, you can keep your business credit high

Credit Balance Must be Low

It’s important to keep your credit balance low. Aim for a credit utilisation rate of 30% or less. That means if you have a 10 lakh INR credit line, you should try to use no more than 3 lakh INR at any given time
If you need to withdraw more, you can, but be sure to pay it back promptly to keep your credit rating up.

Avoid Cancelling Old Credit Accounts

Having a long credit history is a valuable asset for any business. Keeping your credit accounts open will demonstrate a level of stability to lenders.

It will also show that you’ve been trusted by your suppliers and vendors over a long period. Plus, you won’t lose out on the value of that history, as it can be included in your credit rating calculation

Maintain a Good Payment History

Having a good payment history is essential when it comes to applying for a business loan. Your credit report reflects your creditworthiness and helps lenders decide the terms, conditions, and interest you’re offered.

It records the credits taken, repayment of these loans, length of credit history, and your capability of repaying debt.

To ensure your payment history is in good standing, it’s important to pay your dues on time.

Also Read: Empowering Women Entrepreneurs: A Comprehensive Guide to Business Loan for Women

Manage Your Company’s Debt

Being in debt can hurt your business credit rating and make lenders wary of working with your company.
Before taking out a new business loan, make sure to pay off any existing debts to keep your credit rating high. Managing your company’s debt efficiently is key to success!

Top Credit Rating Agencies in India

Credit Rating Agencies (CRA) are like the financial equivalent of the ‘judges of the court’. They weigh in on the creditworthiness of organisations and different entities. In simpler terms, these agencies analyse a debtor’s ability to repay the debt and rate their credit risk based on that.

SEBI is the regulator of credit rating agencies in India. Here are the top credit rating agencies in India:

Credit Rating Information Services of India Limited (CRISIL)

CRISIL is a well-established credit rating agency in India. It was founded in 1987 and went public in 1993. In 2017 it acquired an 8.9% stake in the CARE credit rating agency. In 2018, CRISIL launched India’s first index to measure the performance of FPIs in the fixed-income market. CIRSIL’s portfolio is also diversified, offering services such as mutual fund rankings, ULIP rankings, and the CRISIL coalition index.

ICRA Limited

Established in 1991, ICRA Limited is a public limited company based in Gurugram, India. ICRA was initially a joint venture between Moody’s and several Indian financial and banking service organisations. It went public in April 2007. ICRA’s main shareholder is Moody’s Investors Service, an international credit rating agency. The ICRA Group has four subsidiaries. They offer a wide range of credit ratings including corporate debt, financial rating, and market-linked debentures

Credit Analysis and Research Limited (CARE)

CARE is an established credit rating agency founded in 1993 in Mumbai. It provides services such as corporate governance and financial sector ratings. Additionally, CARE offers valuation services. They include equity, debt instruments, and market-linked debentures.

Most recently, CARE launched ARC Ratings. ARC is their new international credit rating agency. It is in partnership with four other partners from South Africa, Brazil, Portugal, and Malaysia. ARC Ratings has already issued sovereign ratings for various countries, including India

Brickwork Ratings (BWR)

Established in 2007, Brickwork Ratings is a Canara Bank-supported credit rating agency. It is also recognised by the RBI as an External Credit Assessment Agency (ECAI). BWR has expertise across a wide range of industries, from banking and capital markets to real estate and education. Brickwork Ratings offers ratings for everything from bank loans and corporate governance to IREDA, MFI, and MNRE

India Ratings and Research Pvt Ltd

India Ratings is a subsidiary of the esteemed Fitch Group. It provides credit rating in India for a wide range of entities, including insurance companies, banks, and urban local bodies
India Ratings is recognised by SEBI. It also holds the distinction of being acknowledged by the RBI and the National Housing Bank.

Navigating Credit Rating in India

We hope we’ve shed some light on the basics of credit ratings as well as the role of credit rating agencies in India.

Remember, when assessing credit risk for a particular business, it’s best to work with a qualified credit risk management advisor. Doing this will ensure that you’re making the best informed and most accurate decisions when it comes to the creditworthiness of your business.

Now, it’s time to take what you’ve learned and enlighten the business world with your newfound knowledge of Indian credit ratings. After all, arming yourself with this information will give you an edge when it comes to running a successful business!

Want to explore helpful techniques to save and grow your hard earned money? Dive in to our guide on Save Money

Frequently Asked Questions (FAQs)

What is a credit rating and why is it important?

A credit rating in India is a score that lenders use to determine the creditworthiness of an individual. It’s important because lenders use it to decide if they should lend money to an individual, how much they should lend, and what interest rate they should charge. Having a good credit rating can make it easier to get a loan and can result in lower interest rates.

How are credit ratings calculated?

A business credit rating in India is calculated by taking into account a variety of factors, such as payment history, the size of the company, and its financial strength. The ratings are based on publicly available information and the creditworthiness of the business itself. The credit rating scale in India range from AAA to D, with AAA being the highest, and D being the lowest.

What factors affect my credit rating?

A business credit rating in India is determined by a variety of factors. It includes payment history, credit utilisation and business size. Payment history looks at how well you manage payment on loans, credit cards, and other obligations. Additionally, Credit utilisation, and the size of your business are also taken into account when calculating your business credit rating.

How can I maintain a good credit rating?

The key is to make sure you pay all your bills on time, avoid taking out too many loans, and keep your credit utilisation ratio low. Additionally, you should review your credit report regularly and make sure there are no errors or fraudulent activity

To read more related articles, click here.

Got a question on this topic?

Related Articles