Credit rating means evaluation of the credit worthiness of an Individual / Business Concern and to express opinion about the ability of a borrower (individual or business concern) to make payment of interest and principal as per commitment.
Credit worthiness depends upon various factors like willingness & ability to pay for the obligations, financial health, market standing, market share, technological competence etc of an organisation. Credit rating establishes a link between risk and returns. An investor or any other interested person uses the Credit Rating to assess the risk level and compares the offered rate of return with that of his expected return.
Credit Rating also helps an organisation in raising debts from the public with a very minimal cost of borrowing. Credit Rating acts as a marketing tool for the various financial instruments.
The first Credit Rating Agency in India CRISIL (Credit Rating Information Services of India Limited) was set up in the year 1987. The other important Credit Rating agency in India is LICRA, (Licensed Indian Credit Rating Agency). With the rapid corporatisation the investment options for the small investors have increased manifold. The retail investors may not have the necessary expertise to judge the various inherent risks involved in the various investment options. To protect the interests of the retail investors, the SEBI i.e.
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The Securities and Exchanges Board of India has made it mandatory for all the listed companies to obtain credit rating, and credit rating is also mandatory for all those enterprises willing to raise money from the public issue of various financial instruments.