Role of Credit Rating Agencies

Credit Rating Agencies are the main authority to assign rate of credit for the companies who issue debt. Any investor can measure the risk of bad debt after analysis these credit rates. These credit rates are fixed on the basis of ability to pay back the loan.

Credit Rating Agencies are also helpful to rebuild the investor confidence which is vital to the global capital markets.

In capital market, its importance is not less than SEBI because credit rating agencies protect different investors from risk of financial loss by providing them upto date information of credit rate. Many other key roles can be explain with following way:

1. # To compare the loan on the basis of quality of credit and loan. Suppose X, Y and Z are three companies offering debentures to investors. Credit rating agencies will assign their credit rate because these are financial expert and assign rate on the basis of analysis of past financial records and statements. Credit rating agency will assign rate AAA to best of X, Y and Z and to invest AAA -credit rating company means low risk of loss.

2. #  Not only show AAA but it show other range of credit rate like A for medium risky company, BBB medium risky and BB high risky and speculative company.

3. # Credit rating agencies also assist to portfolio monitoring. In portfolio monitoring, they provide information about which investment is most secure and provide high return of interest.

4. # Credit quality of transparency.

5. # Credit rating of money market securities.