UPSC Express

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 Services, Standard 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.
    
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  • 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.
  

 Economics