Necessity of Credit Rating, Prepared by Md. Moklesur Rahman (Shehab) MBA Major in Marketing, Khulna University, Bangladesh.

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Credit Rating:
Credit Rating is an opinion on the future ability and legal obligation of an issuer to make timely payments
of principal and interest on a specific fixed income security.
Credit Rating is an unbiased, objectives and independent opinion as to an issuer's capacity to meet its
financial obligations.
A credit rating is a way of assessing the creditworthiness of entities such as individuals, groups,
businesses, non-profit organizations, governments, and even countries. Special credit rating agencies
analyze their financial risk to see whether or not these borrowers will be able to pay back loans on time.
The credit rating agencies compile this rating using a detailed report that takes into consideration various
factors such as lending and borrowing history, ability to repay the debt, past debts, future economic
potential, and more.
A good credit rating improves credibility and indicates a good history of paying back loans on time in the
past. It helps banks and investors decide about approving loan applications and the rate of interest
offered.
Types of Credit Rating:
The various credit agency agencies use similar alphabetical symbols to determine credit ratings.
However, these ratings are also grouped into two types of grades – ‘investment grade’ and/or ‘speculative
grade’.
1) Investment grade: These ratings refer to the fact that the investment made is solid, and the borrower
will most likely meet the repayment terms. Thus, they are often priced less.
2) Speculative grade: These ratings show that the investments are at a higher risk, and they often have
higher interest rates.
As per credit rating agencies regulations 1999.
Rating means– An opinion regarding securities– Expressed in the form of standard symbols– Assigned
by a credit rating agency– Used by an issuer of such securities Evaluates the credit worthiness of a
debtor, especially a business (company) or a government. It is an evaluation made by a credit rating
agency of the debtors ability to pay back the debt and the likelihood of default.
Some credit rating agencies; ARGUS Credit Rating Services Limited, CRAB, CRISIL, S & P, Moody's
Difference between Credit Rating and Credit Score:
Sometimes, the terms credit score and credit rating are used interchangeably, but they are not the same
thing.
As mentioned above, a credit rating is used to determine the creditworthiness of a business or a company
rather than individuals. This essentially means the probability of them defaulting on payments. The rating
is usually shown as a series of alphabetical symbols, and it is calculated using corporate financial
instruments.

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However, a credit score is a number, usually between 300 and 900, that is given to individuals to rate
their creditworthiness. It is calculated by credit bureaus based on the person’s credit information report,
and plays a role in determining whether or not they are approved for loans and credit cards.
Importance of Credit Rating:
Since a credit rating is an assessment of a borrower's creditworthiness, a higher credit rating suggests
that the company or entity is more likely to repay the borrowed credit. On the other hand, a lower credit
rating might mean that they have a higher probability of turning into a defaulter. This can make it difficult
for them to borrow money, as lenders will consider them high-risk borrowers.
However, there are other ways that credit rating is important:
.
Importance For The Money Lenders :
1) Better Investment Decision:
Lenders and investors can make better and more sound investment decisions by taking into account the
risk of the entity who is borrowing the money.
2. Safety Assured:
When lenders know the credit rating of potential borrowers, they can be assured that their money will be
paid back in time, with the correct amount of interest .High credit rating means an assurance about the
safety of the money and that it will be paid back with interest on time.
Importance For The Money Borrowers :
1) Easy Loan Approval:
When companies have a higher credit rating, they will be seen as lower risk and therefore get loan
applications approved more easily. With higher credit rating, banks will approve your loan application
easily.
2) Consideration Rate of Interest:
Lenders like banks and financial institutions will also offer loans at a lower interest rates for entities that
have a higher credit rating. You must be aware of the fact every bank offers loan at a particular range of
interest rates. One of the major factors that determine the rate of interest on the loan you take is your
credit history. Higher the credit rating, Lower will the rate of interest.
Thus, having a higher credit rating can help a company raise money and expand, while also reducing the
cost of borrowing. And, for lenders, these ratings can help them obtain more detailed financial information
and encourage better accounting standards.
The Factors that affect Credit Rating:
There are a number of factors that can affect the credit ratings of a company, including:

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The company’s financial history:
1) Lending and borrowing history
2) Past debt
3) Payment history
4) Financial statements
5) Level and type of current debt
The company’s future economic potential:
1) Ability to repay the debt
2) Projected profits
3) Current performance
Therefore the following are some of the primary elements that determine credit ratings:
1) Company outstanding debt on the basis of volume and composition.
2) Company stability of future cash flow and earning capacity affect the rating of the company.
Likelihood of an individual to meet the fixed interest obligation.
3) The operational efficiency also affects the credit rating of the company in respect of the optimum
utilization of resources and their investment.
4) A past record of the company’s promoters, directors and staff also affect the good rating of the
company.
A credit rating is an assessment of creditworthiness for any entity that wants to borrow money. This
includes corporations, NGO's, provincial authorities, or governments. These ratings are assigned by
verified credit rating agencies that assess the company’s financial history and its ability to repay borrowed
debts.
Since it is used by lenders and investors to decide whether or not to approve loans or join in business
ventures, it is important to have a good credit rating as it can help a company raise money, reduce
interest rates, and also encourages better accounting standards.
Benefits of Credit Rating:
In today's economy, credit ratings are quite important. It is advantageous from the standpoints of
investors, companies, individuals, and intermediaries.
From the Perspective of the Investor:
1) Making investment decisions: Credit scores assist investors in making investment decisions. It gives
the investor a notion of a company's trustworthiness and also assists the investor in determining the risk
level of a certain instrument. A better credit rating indicates that an investor is more willing to make a risky
investment.

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2) Provides security: If a company's credit rating is good, investors can feel safe about their
investments, and the chance of bankruptcy is low.
3) Saves time and effort: Credit ratings assist investors in making quick investment decisions by relying
on ratings provided by a professional CIBIL score repair company. The investor does not have to waste
time and effort acquiring and analyzing financial information on a company's credit standing.
4) Performed by experts: Credit rating is often performed by professionals with extensive experience.
Investors can confidently rely on these evaluations and make investment decisions without anxiety.
5) Recognize return risks: A credit rating is an important instrument for estimating the risk of expected
returns. It assists the investor in determining the organization's worth.
From the Perspective of a Company:
1) Builds goodwill: A high credit rating helps a firm build goodwill by instilling confidence and trust in the
minds of investors, shareholders, consumers, and suppliers about the company's image.
2) A good credit score: When a corporation has a good credit rating, it means that its credit score is
good. A good CIBIL score allows for faster loan approvals from financial institutions at cheap interest
rates, as well as other credit perks such as lower loan interest rates.
3) Aids in growth and expansion: A good credit score enables a company to obtain loans from banks
rapidly, allowing it to invest the funds in expansion, diversification, and modernization.
4) Provides liquidity: In the market, a corporation with a solid credit rating provides liquidity for various
credit instruments as well as money mobilization.
From the Perspective of the Consumer:
1) Assists in the channeling of funds: High credit rating firms help people channel their savings into
productive investments, which boosts investment and encourages people to save.
2) Interest protection: Without a credit rating, no corporation can try to defraud an individual with a high
rate of interest, which protects the individual's interest.
From the Perspective of the Intermediaries:
Intermediary Merchant bankers, underwriters and other intermediaries wil find ratings valuable in the
planning, pricing and placement of their client's debt securities. Rating facilities the placement of debt
issues to a wide investor base. When a corporation assigns a rating to various credit instruments, it saves
time and effort for stockbrokers because they must make less efforts to persuade their clients of the
merits of various investment propositions.
Limitation of Credit Rating:
Credit ratings are not founded on numerical equations. Rather, credit rating companies utilize their
judgment and involvement in figuring out what public and private data ought to be considered in giving a
rating to a specific organization or government. There are several limitations of credit rating. Some of
these are as follows:

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1) Biased rating and misrepresentation: In the absence of quality rating, credit rating is a curse for
capital market industry. To avoid biased rating, the expert in rating agency, carrying out detailed analysis
of the company, should have no links with the company or the persons interested in the company so that
they can make their report impartial and judicious recommendation for rating committee.
2) Static study: Rating is done on the present and the past historical data of the company and this is only
a static study. Prediction of the company health through rating is momentary and anything can happen
after assignment of rating symbols to the company dependence for the future result on the rating,
therefore defeat the vary purpose of the risk indicative of the rating.
3) Concealment of material information: Rating company might conceal material information from the
investigating team of the credit rating company, in such cases quality of rating suffer and renders the
rating reliable.
4) Rating is no guarantee for soundness of the company: Rating is done for a particular instrument to
assess the credit risk but it should not be considered as a certificate for matching quality of the company
or its management.
5) Human bias: Finding of the investigation team at times may suffer from with the human bias for
unavoidable personal weakness of the staff and might affect the rating.
6) Down grade: Once the company has been rated and if it is not able to maintain its working result and
performance, credit rating agency would review the grade or downgrade the rating resulting into impairing
the image of the company.
7) Validity of rating: Validity of the rating ends with the maturity of a debt instrument and it is no longer
subsequently benefits the issuer company because the rating is valid for the life time of the debt
instrument being rated.
8) Difference in rating of two agencies: Rating done by two different credit rating agencies for the same
instrument of the same issuer company in many cases would not be identical. Such difference is likely to
occur because of the because of the value judgment differences on qualitative aspect of the analysis in
two different rating agencies whereas quantitative analysis might be the same and identical.

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As a result, credit rating is a tool that investors require when making investment decisions. It will be
advantageous to investors if ratings are transparent and systematic. Maintaining a healthy credit score by
repaying outstanding sums on loans and credit cards on a timely and regular basis is also critical. A good
CIBIL score ensures a person's future security.
Md. Moklesur Rahman ( Shehab)
Senior Executive
ARGUS Credit Rating Services Limited (ACRSL)
Sky View Henolux Centre
Level#6, 3/1 Purana Paltan
Dhaka-1000, Bangladesh.
Mobile Number : 01913 40 16 79
E-mail: sheikhshehabakcc@gmail.com