Evolving Landscape of the Credit Rating Industry in India

Published by Sharekhan Education | January 23, 2023

Amit Pathak | Sharekhan Education

Introduction

A credit rating agency (CRA) is a company that assigns credit ratings. Credit rating agencies can assign credit ratings to any entity, company, state, provincial authority, or sovereign government. Which seek to raise debt capital. It is an assessment of the creditworthiness of the borrower. Credit ratings predict the relative default probabilities of debt securities and debt issuers. The ratings are provided as symbols like AAA, BBB, BBB-, etc.

Categories

The credit rating categories are Investment-grade, non-investment grade, and Default grade. The Investment-grade is a significantly safer grade as compared to other grades.

Credit Ratings are based on qualitative and quantitative assessments. Like past debt repayment behavior, operating productivity of the entity, and the potential of future cash flows.  Which determine the ability of the borrower to repay his debt. The ratings have a detailed rationale. CRAs provide independent evidence and research-based opinion. The agencies review the ratings periodically and upgrade or downgrade them as the circumstances change for the entity.

Significance

CRAs provide capital market participants with a framework for comparing “credit quality”. These agencies help lenders determine the potential risk involved in lending money to a particular borrowing entity. A good credit rating indicates higher creditworthiness and a lower risk of default for the lender. A good credit rating helps an entity to raise money easily and on better terms.

Debt securities rated by a rating agency get greater confidence amongst the investor community. Credit ratings decide the eligibility for some institutional investors’ debt portfolios, owing to national regulations which restrict investment in risky bonds.

Industry overview

The Credit Rating Industry in India is oligopolistic in nature with few players occupying the lion’s share of the market. RBI and SEBI have brought in regulations that require large corporates to increase their reliance on financing through the capital market route. SEBI has mandated large corporates (with borrowings of more than Rs. 100 Crores) with a rating of AA or above. Also to raise not less than 25% of their incremental borrowings from the debt capital markets. SEBI has mandated that monitoring of  proceeds of IPO, FPO, or Rights issue are to be done only by CRAs. The long-term outlook for the credit ratings sector remains positive, given the large funding requirements. Which will be able to raise a combination of bonds and bank loans.

CRISIL

Let us discuss CRISIL in this space. CRISIL is a key beneficiary of the strong uptick in credit growth. With improving economic macros, favorable upgrade/downgrade ratio, market share gains, all-around improvement in the research segment, and opportunities in the advisory division; revenues and earnings are estimated to grow at 13% and 15% CAGR, respectively, over CY21-23E. EBITDA margins are estimated to expand to 26-27% over CY22-23E led by operating leverage. The company has an asset-light business model, diversified revenue mix, strong parentage, and superior rating standards.

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