Nature of credit rating

(1) Rating is based on information: Any rating based entirely on published information has serious limitations and the success of a rating agency will depend, to a great extent, on its ability to access privileged information. Cooperation from the issuers as well as their willingness to share even confidential information are important pre-requisites. The rating agency must keep information of confidential nature possessed during the rating process, a secret.

(2) Many factors affect rating: Rating does not come out of a pre-determined mathematical formula. Final rating is given taking into account the quality of management, corporate strategy, economic outlook and international environment. To ensure consistency and reliability a number of qualified professionals are involved in the rating process. The rating committee, which assigns the final rating,consists of specialised financial and credit analysts. Rating agencies also ensure that the rating process is free from any possible clash of interest. 

(3) Rating by more than one agency: In the well developed capital markets, debt issues are, more often than not, rated by more than one agency. And it is only natural that ratings given by two or more agencies differ from each other e.g., a debt issue, may be rated 'AA+ ' by one agency and 'AA' or 'AA-' by another. It will indeed be unusual if one agency assigns a rating of AA while anoher gives a 'BBB'.

(4) Monitoring the already rated issues: A rating is an opinion given on the basis of information available at particular point of time. Many factors may affect the debt servicing capabilities of the issuer. It is, therefore,that rating agencies monitor all outstanding debt issues rated by them as part of their investor service. The rating agencies should put isssues under close credit watch and upgrade or downgrade the ratings as per the circumstances after intensive interaction with the issuers.

(5) Publication of ratings: In India, ratings are undertaken only at the request of issuers and only those ratings which are accepted by the issuers are published. Thus, once a rating is accepted it is published and subsequent changes emerging out of the monitoring by the agency will be published even if such changes are not found acceptable by the issuers. 

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