About: Credit Rating Agencies

About: Credit Rating Agencies

  • A credit rating agency is a company that assesses the financial strength of sovereign companies and government entities, especially their ability to meet principal and interest payments on their debts.
  • The rating assigned to a given debt shows an agency’s level of confidence that the borrower will honour its debt obligations as agreed.
  • Each agency uses unique letter-based scores to indicate if a debt has a low or high default risk and the financial stability of its issuer.
  • The debt issuers may be sovereign nations, local and state governments, special purpose institutions, companies, or non-profit organizations.
  • At the request of the country, a credit rating agency evaluates its economic and political environment to assign it a rating.

The Big 3 Credit Rating Agencies:

  • The credit rating industry is dominated by three big agencies, which control 95% of the rating business.
  • The top firms include Moody’s Investor ServicesStandard and Poor’s (S&P), and Fitch Group.
  • Moody’s and S&P are located in the United States, and they dominate 80% of the international market.
  • Fitch is located in the United States and London and controls approximately 15% of the global market.

Credit Rating Agencies in India:

  • In India, there are six credit rating agencies registered under Securities and Exchange Board of India (SEBI) namely, CRISIL, ICRA, CARE, SMERA, Fitch India and Brickwork Ratings.

About: Moody’s Investor Services

  • Moody’s Investor Service, also known as Moody’s, is a bond credit rating agency.
  • It provides international financial research on bonds issued by commercial and government entities.
  • The company ranks the creditworthiness of borrowers using a standardized ratings scale which measures expected investor loss in the event of default.

How do Moody’s Ratings work?

  • Moody’s Investors Service use a standardized rating scale from Aaa to C.
    • Aaa’– Highest Quality and Lowest Credit Riskand
    • C’– Lowest Quality, in default and low possibility of recovering principal and interest.

News Summary:

  • Moody’s Investors Service has revised the outlook on India’s sovereign rating to ‘stable’ from ‘negative’, citing receding risks to the economy, particularly from weakness in the financial sector.
    • However, the rating remains unchanged at the lowest investment grade of ‘Baa3’.
    • In June 2020, Moody’s had downgraded India’s sovereign rating to Baa3 from Baa2 with a negative outlook.

  • Now, Moody’s and Standard & Poor’s have a stable outlook on their ratings on India, while Fitch still has a negative outlook.
    • All three rating agencies have given India the lowest investment grade.

    • This means, India is just one notch above the non-investment grade or junk grade.

What Moody’s said:

  • Moody’s said it expects India’s real GDP growth to average around 6% over the medium term.
  • The rating agency said it could upgrade the ratings if India’s economic growth potential increased materially beyond its expectations, supported by effective implementation of government economic and financial sector reforms.