There are numerous organisations across the globe which evaluates credit-related risks of different financial institutions. Amongst the different rating agencies in India, Credit Rating Information Services India Limited is the most established name. Controlling over 65% of the Indian market, CRISIL was established in the year 1987. Currently, the biggest organisation functioning in the Indian market, Standard & Poor’s is the majority stakeholder of this rating agency.
Ratings offered by this organisation and its likes are known as credit ratings. These are a comprehensive analysis of every type of credit-related risks associated with a financial institution and their different financial offers and instruments.
Irrespective of whether an individual is investing in a fixed deposit or debenture, or simply availing savings related facilities; it is vital to note the credibility of the financial institution in which they are about to invest.
Since this rating impacts the credit reliability of a financial institution, typically it also impacts the different rates of interest offered by them. From FD interest rates to every other type of interest paid by a financial institution, every financial instrument is evaluated and impacted by these ratings. The importance of these ratings can be understood by the following risks which are evaluated by these agencies.
A financial institution runs the risk of defaulting if they incur major losses, especially for a prolonged duration of time. In case a financial institution defaults, all investors lose their investments. Despite the nationalisation of different financial institutions and subsequent safety measure, investors run the risk of losing on their financial assets in case of default.
CRISIL and other rating agencies judge the default risk of a financial institution, ensuring investors are aware of the condition of this organisation in the current market.
The most crucial functionality of any institution dealing with monetary matters is their financial reliability and credibility. Credit ratings look into the numerous financial aspects like cash flow, debt service ability, etc.
Consequently, investors should understand how to pick the right NBFC for a fixed deposit or any other investment option by checking these ratings. Additionally, credit ratings also take into account the current financial performances as well as expected future performances. This also reflects in the FD interest rates and other rates offered by these financial institutions.
Analysis of business-related risks takes into account all policies and related issues. These policies are directly responsible for the cash flow of a financial institution. Additionally, it also determines the future sustainability of their cash flow. Stability of implemented business policies is another aspect that is taken into account while analysing the risks.
Business management risk
Every financial institution is based on founding principles and basic structural philosophies. This includes management policies, as much as it takes into account customer and investor-related strategies. Consequently, these factors also impact CRISIL and other ratings of a financial institution.
Furthermore, they also look into the stability and past track record of the management policies. This provides a fair insight into how the company can be expected to move forward. As a result, institutions moving into new ventures which are above the financial value of their usual ventures can even expect a fall in their rating.
Related to the discussion immediately above, every new project and their expected outcomes are also factored in while granting the rating to a financial institution. On one hand, this takes into account past records and success of handling new projects.
On the other hand, it also takes into account the numerous risks which can be related to this venture. Any investor considering to invest in a new offering by a financial institution can gauge the risks related to their new projects and ventures.
CRISIL and other ratings provide a comprehensive assessment of all the above-mentioned issues. As a result, it is essential investors look into this rating before they invest in any policy offered by a financial institution or an NBFC.
While it is crucial for every investor to understand the right time to invest in an FD, it is also vital to assess the associated risks by checking the credit ratings. For example, Bajaj Finance FD is rated AAA by CRISIL.