Credit ratings, whether internal or external, has been an important tool in assessing the risk profile and lending suitability of a borrower. As an integral component in credit decision making, banks and financial institutions have historically relied on the rating category of the client. An external credit rating is done by a domestic/ International credit rating agency. In our country, at present there are seven domestic credit rating agencies accredited by the RBI. These are CARE, CRISIL, India Ratings and Research Private Limited (India Ratings), ICRA, Brickwork, SMERA and INFOMERICS. Some of the International Credit Rating Agencies are Moody’s, Standard & Poor and FITCH. A high credit rating indicates higher financial soundness of the company. Whereas a low credit rating indicates a lower good will of the company. To understand the credit rating we take an example of credit ratings given by CRISIL. Degree of financial soundness and lending safety changes from highest to lowest as we move from a rating of “AAA” to “AA” to ”A” to ”BBB” to BB” to “B” to “C” to “D”. While a rating of “AAA” indicates highest financial soundness of the company, whereas a rating of “D” indicates worst financials and highest lending risk.
Credit rating involves detailed analysis of company’s financials, credit history, and other risk parameters. However, this comprehensive and analytical process is not being exploited completely as its utility is not only limited to indicating the risk perception of a borrower but also stores good amount of insight about the client which can help in charting the improvement path wherever scope exists.
We have empirically seen in credit propositions that the majority of clients are keen to know their ‘rating’ but are not inclined for its deeper understanding. Somehow the fact that rating analysis unravels important aspects of financial and non-financial credentials of a client is underrated and only the rating outcome remains important. As such, very relevant chunk of consultative knowledge gets buried in papers whereas it could have served a larger purpose.
Simplistically we can say that during a credit rating exercise, a detailed analysis of financial documents is done. In this process, the analysts figure out the strengths of business and management. Areas where the client is not strong and needs to work for improvement is also identified and commented upon. Subsequently, the client is placed in a suitable risk bucket which is in line with the overall strength. In general practice, the story of rating ends here. However, if the clients are interested and keen, the analysis can be used to understand the inhibitors and weaknesses in their financial profile. This can be further used to chart an action plan to gradually monitor and improve upon these parameters which can help them to not only achieve a better credit rating in the coming year but also strengthen their fundamentals.
In above discussion, the important part is drive of the client towards growth. However, the general awareness level of clients in MSME and Mid-corp segment towards this approach is low. While there are outliers, but largely this holds true for majority of the tribe. Here scope exists for the rating agencies and banks to offer this as a value added advisory service over the tenure of their association. This certainly will be considered progressive and a step up in the conventional lending relationship. Incremental advantage will be greater client integration and stickiness.
Shailesh Kumar Jha
Chief Manager & Faculty
SBILD, Ajmer
