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Roles and responsibilities of credit rating

Credit rating agencies have acquired wide significance and gained immense importance among investors, creditors and in the financial market. Credit rating is an estimate of arriving at the conclusion of the ability of an individual or an organization to suffice their financial commitments. Their ability is assessed based on previous dealings. The agencies involved in credit rating share their opinion upon the credit quality of the individual or firm. Therefore, the rating shared by a rating agency is considered as summary information or the most liable predicting factor about the credit quality of the involved payee for economic decision-makers or investors and so is of great importance and viability.

Credit rating agencies:

Credit rating agencies offer the investors, and economists with highly important and required information like the creditworthiness of the borrowers who may be individuals, or group of individuals, or an institution or even a government. These agencies mainly foresee the quantitative and qualitative risks of lending amount. Actually, these agencies analyse the credit risk of each body involved in the investing process. Hence it favours the investors to make better decisions and choose the right investment. Their roles and responsibilities include:

  1. Analyses the borrower
  2. Offers higher confidence from investors
  3. Evaluation of industrial risk
  4. On looking operating efficiency
  5. Assessing financial flexibility
  6. Varied services
  7. Evaluation of management
  8. Increased economic growth

Responsibilities of Credit Rating Agencies:

  1. Analyses the borrower:

The agencies gather and analyse the previous and existing financial data including the earnings, income level, liabilities (if any), potential of the borrower to repay the loan and assets. The analyst looks for both pros and cons and also the indicators or predominantly evident factors that the borrower might bring a level of risk. The data is analyses and inferred by the agencies and at last, concludes whether to give approval or reject a loan. Also, these agencies are the primary force that determines if the additional charge fees and interest can be increased or decreased for a particular client.

Also, Read: Credit Rating Agency SEBI Registration

  1. Offers higher confidence from investors:

A company rated by the credit rating agencies have a greater edge than companies that aren’t rated due to the transparency available to investors upon the advantages, risks and disadvantages in investing in a particular firm. Since every practically rational investors expects high returns from available resources and hidden and unpredictable risks, an open and fair analysis of the progress, trend, standard of the company given as a report by the agency Helps the investor to look forward to investing in right one and also consider the way of being successful for those entrepreneurs.

  1. Evaluation of the industrial risk:

If the process lags due to other competitors or substitutes or unpredictable risks, then the evaluation of the agency upon risks and the measures to overcome them, are taken into account while rating them which helps the investors as well receiver to change upon or improve upon.

  1. On looking operating efficiency

The ability to produce the maximum possible output (product) with available resources (input – raw materials) is called operating efficiency or utilization of capacity. Utilizing full capacity makes a company more advantageous and advanced than other companies. It may be possible by high technical efficiency, skilled labors or location. The agency takes these too into account.

  1. Assessing financial flexibility:

Financial flexibility is the Capacity of a firm or borrower to arrange for an alternative source of money and react to an unexpected crisis or inevitable yet unprecedented expenses and investment opportunities. The agencies also assess a firm’s financial flexibility to reduce its risk depending upon the investor or debtor. It’s all a part of the rating methodology that favors investors and borrowers.

  1. Evaluation of management:

Evaluation of management is one of the highly important functions of these agencies. Management is the highly required talent to make use of all other works from giving input, getting output, coordinating labor, procuring proper technology and so on. Thus, the credit rating agencies give due care and concern for this field too.

  1. Varied Services:

Though the agencies importantly assess different sectors and aspects of firms in terms of performance, they also offer a variety of services like giving solutions and suggestions for the upgrade of firm services. They carry on research works too for the development of the industries and offer training to the staff and authorities too for better management. They carry on thorough research on the launching of a new project, risks in new projects, focussing on alternative and resolving pathways to the risks into the respective industry. They are ready to offer funds too through their mutual fund sector.

  1. Increased economic growth :

A positive rating from the agencies enhances the economic growth as investors are ready to provide loans or debt to people in need for startups and own businesses. Thus, the agencies can contribute or add to the overall well-being and growth of any economy because there are transactions. Thus, increased credit combined with low interest can improve the provider as well receiver’s lives and allow businesses to prosper.

Closing Thoughts

The habit of Credit rating has got the immense name and fame in this century and it’s almost inevitable now since its roles and responsibilities are so important and inevitable for an individual, community, economy, institution, or government. Credit rating is an art that must be rightly mastered as well as a science that must be rightly applied.  Hence, everyone must understand the entire process of credit rating and appreciate its roles and responsibilities.

About Akash Kumar

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The author is Akash Kumar, working as Legal Associate with Enterslice Ites Private Limited, a Chartered Accountancy firm helping Startup & companies in setting up the business and complying with various tax laws applicable to Indian & foreign companies while establishing their business.

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