Context: Fitch Ratings has lowered its 2023-24 GDP growth forecast for India to 6%, from 6.2%, citing headwinds from elevated inflation and interest rates along with subdued global demand, with the expansion seen quickening to 6.7% in 2024-25, as against the 6.9% projected earlier.
India’s GDP Growth Projection
- India was given default rating at ‘BBB-’ with a stable outlook. It indicates that expectations of default risk are currently low and payment capacity to meet financial commitments is considered adequate, but adverse business or economic conditions are more likely to impair this capacity.
- It forecast headline inflation to decline, but remain near the upper end of the Reserve Bank of India’s 2%-6% target band, averaging 5.8% in FY24.
Fitch Ratings Inc. is an American credit rating agency and is one of the “Big Three credit rating agencies”, the other two being Moody’s and Standard & Poor’s. It is one of the three nationally recognized statistical rating organizations (NRSRO) designated by the U.S. Securities and Exchange Commission in 1975.
What Are Credit Rating Agencies?
- Credit rating agencies (CRAs) evaluate and rate the creditworthiness of debt securities and their issuers, including companies and countries. These agencies assign credit risk ratings to such entities based on quantitative and qualitative analyses. Ratings show the likelihood of a borrower to default or repay a loan with interest.
- Credit rating services use unique letter codes to depict the default risk and the financial stability of the debt issuer. While these ratings provide risk measures for an entity, investors get to know about its creditworthiness. Besides corporations and nations, these ratings can be for stocks, bonds, mortgage-backed securities, collateralized debt obligations, and credit default swaps.
- The rating services assign letters to represent the risk of default and financial viability of the debt issuer, based on quantitative, qualitative, and contextual analyses.
- Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings are the 3 big credit rating agencies, with a combined market share of approximately 95%.
How Do Credit Rating Agencies Work?
- Credit rating agencies evaluate and rate companies, nations, governments, or financial instruments. They essentially provide information about the quality of fixed-income securities and debt obligations and their issuers’ ability to repay the principal amount and interests. In short, these credit risk ratings help retail and institutional investors get an idea of the solvency of the borrower and its products. They can decide whether the security in question is worth the investment or just speculation.
What Do Credit Ratings Say?
- Credit rating meaning differs with entities and financial instruments, though they evaluate issuers’ credit or default risks and debt obligations. For example, a company can use it to rate its debt securities, while a country can use the same to attract domestic and foreign investments. Ratings for sovereign debts indicate the country’s ability to repay its debt. Also, a sovereign credit rating facilitates access to international financial markets for the government.
- Similarly, a bank can use it to assess the risk premium on loans. Poorly rated loans have a higher risk premium and higher interest rates. A higher credit rating enables the borrower to obtain loans at a lower interest rate. Credit ratings allow traders to trade fixed-income on the secondary market and influence their interest rates – a higher grade gets a lower interest rate.
- Credit risk ratings indicate the likelihood of a borrower defaulting on its obligation. While low risk suggests investment, high risk implies speculation. Furthermore, these scores provide an outlook for an issuer or financial product in the future. Also, these scores aid in the development of the financial market and its regulations.
Role Of Credit Rating Agencies
- The primary role of credit rating services is to assess the credit risks and solvency of structured debt securities and their issuers, i.e., companies and governments. Since they also act as financial intermediaries, there are multiple objectives that they fulfil, such as:
Credit rating agencies in India:
- Currently, there are 7 leading Credit Rating Agencies (CRAs) in India, such as CRISIL, ICRA, CARE, Acuite Ratings & Research, Brickwork Ratings India Pvt. Ltd. India Ratings and Research Pvt Ltd, and Infomerics Valuation and Rating Pvt. Ltd. that are authorised by SEBI to assess credit ratings.
- SEBI (Securities and Exchange Board of India) authorizes and regulates all Credit Rating Agencies (CRAs) in India as per SEBI Regulations, 1999 of the Securities and Exchange Board of India Act, 1992.
What is the difference between credit rating and credit score?
- Credit rating involves evaluating the creditworthiness of entities, usually governments and businesses, by credit rating agencies, such as CRISIL, ICRA, CARE, etc. Credit ratings are usually expressed as letter grades.
- Whereas, credit scores usually help determine the creditworthiness of individuals and are calculated on the basis of the credit history found in the credit report.
- Credit scores are computed by four major credit bureaus in India including TransUnion CIBIL, Equifax, Experian and CRIF Highmark. Credit score is a 3-digit number ranging between 300 to 900, where a score closer to 900 is generally considered to be a good score.