Credit Rating

How to Set Up a Credit Rating Agency in India?

A Credit Rating Agency in India can be set up after SEBI grants the approval for such business. SEBI (Credit Rating Agencies) Regulations 1999 provides for certain parameters for the grant of certificate to start such business. In this article we will discuss more about this agency in India.

What do you mean by Credit Rating?

Credit rating refers to the analysis of the possible risks of credit associated with granting financial instrument to an individual or a company. This rating is provided on the basis of creditworthiness and the credentials of an individual or company.

So how is the creditworthiness decided? Well, the creditworthiness of an individual/company is decided upon lending and borrowing transactions mad in the past. It is determined after the statements of liabilities and assets and their ability to meet the debt obligations are weighed.

What is a Credit Rating Agency?

It evaluates and assess an individual’s or a company’s creditworthiness. These agencies consider the income of a debtor and credit lines to analyse the ability of the debtor to repay the debt or if there is any credit risks which is associated with it. 

SEBI reserves the right to regulate and the right to authorize these credit rating agencies under SEBI Regulations 1999^[1] of the SEBI Act.

Process of Credit Rating Agency Registration under SEBI

The process of registration is mentioned below:

• A person who seeks to begin any activity as credit rating agency hen such person has to apply to the board in an application in Form A as mentioned in the regulations with a non-refundable fee.
• It may be noted that the board will not consider the regulations unless the applicant is promoted by a person belonging to the following:

a) A public financial institution;
b) A scheduled commercial bank;
c) A bank that is foreign and which is operating in India with RBI approval;
d) A foreign agency having minimum of five years experience in rating securities and recognized by law.

• Prior to granting the certificate to commence the business, the board shall satisfy itself that the applicant complies with the norms such as:

a) A minimum net worth of 5 crore rupees;
b) Infrastructure is adequate that allows it to provide rating services as per the provisions of the Act;
c) The applicant is a company registered under the Companies Act, 2013 with the main object to carry any activity in its MOA;
d) The applicant is fit and proper person according to the criteria provided in the regulations;
e) Such other requirements as provided under the regulations.

• After being satisfied the Board will send an intimation to the applicant and on receipt of the payment of requisite fees, will grant a registration certificate in Form B, as provided in the regulations. The registration certificate shall remain valid unless it has been suspended or cancelled by the board.
• It may be noted that if the board believes that the application is incomplete and does not conform to the prescribed requirements and instructions specified, the application will be rejected. However, before such an application is rejected, an opportunity to must be given to the applicant.

How do Credit Rating Agency work?

These agencies analyses an organization, individual, entity and assign ratings. These agencies have authority to rate companies, state governments, non-profit organizations, securities, local governmental bodies and special purpose entities.

A number of factors are considered while setting rating like the financial statements, type of debts, lending and borrowing history, the capability of repayment, past credit repayment behaviour and more. These factors contribute to a great extent in computing the end result that is the credit score.

These agencies don’t provide any decision to the financial institutions on whether an entity should get credit facility or not, it provides the report and additional inputs thereby making it easy for the lenders to analyse and make an informed decision.

List of Registered Credit Rating Agencies

As per Securities and Exchange Board of India, the following credit rating agencies are registered to compute and share credit report/score with the financial institutions:

• CRISIL Limited

CRISIL- Credit Rating Information Services of India Limited is one of the oldest agencies that was set up in the year 1987. CRISIL is operational in countries like the UK, US, China etc. and of course, India. This agency stepped in to infrastructure rating in 2016.

• ICRA Limited

ICRA- Investment Information and Credit Rating Agency is a joint venture of Moody’s and Indian Financial and Banking Service Organization that was established in the year 1991. This organization is known to assign corporate governance rating, performance rating, mutual fund rating etc.

• India Ratings and Research Private Limited

It is a wholly owned subsidiary of the Fitch group. It provides accurate and timely credit opinions on the credit market. This firm covers corporate issuers, urban local bodies, managed funds etc. Its headquarters is in Mumbai and other branch offices are located in different parts of the country.

What is the importance of a Credit Rating Agency?

With these agencies, the risk associated with the investing companies can be determined. Therefore it helps in making informed decisions. It also helps in arriving at a fair judgement of the organizations’ ability to fulfil its commitment.

There are many other factors that show us the importance of these agencies. One among them is the easy availability of finance that led to increase in default levels. These agencies play a crucial role in financial markets. They analyze the credit risk of a government or corporate. As there are information about the economic condition of the borrower.

It represents the likelihood that a borrower is gonna meet financial obligations. Therefore the importance of these agencies has gone up as it has helped in assessing the creditworthiness of an individual/company.

Conclusion

In India, Credit Rating Agencies started operations in late 1980s but now there are a number of such agencies that are registered under SEBI. This is due to the fact that a credit rating agency in India offer valuable services, and its role is critical in the investment field.

Read our article:The Procedure for Setting up – Credit Agency in India