Role of Credit Rating Agencies

Role of Credit Rating Agencies

The growth of world economy in the era of globalization and liberalization has witnessed an epoch making growth in credit. The growth of world economy is accelerating by the credit driven boom. Credit, the age old practice of delayed payment of purchased goods has catalyzed the growth of world economy.

Credit rating is assessment of any body’s credit worthiness. This assessment can be applicable to organizations and even to a nation. Depending upon the subject, personal, corporate and sovereign credit rating can be obtained. Personal credit rating is dependant upon ability to repay the loan with interest, saving and sending patterns, amount of credit used by the person. Corporate credit rating is the financial indicator of a certain company for the prospective investors. The sovereign credit rating reveals the credit worthiness of a country hence acting as a yardstick for foreign investors.

A high credit rating symbolizes the potential of timely repayment and good past track record, hence making the process of credit granting a less burdensome task while a poor credit rating generates the reverse idea. The high credit rating leads to lower interest rates, less paper work and early release of the amount while a low credit rating results in a higher interest rate or sometimes refusal of the amount.

A credit rating company deals with the assessment of credit worthiness; it might be of an individual, a corporate sector or a nation. Credit rating agencies dealing with personal credit worthiness calculation are called the credit bureaue or consumer credit reporting agency. The Credit rating agencies are assigned the task of credit ratings for issuers of different types of debt obligations mainly for companies, NGOs (non govermental organisations) and the state.

Fair Isaac Corporation of USA is popularly known as the patron of the concept of credit rating. It started assessing the credit worthiness in fifties of last century. Before it, Alfred M founded A M Best Company Inc in 1897 in New York City. Some of the renowned agencies which deal with assigning credit scores are A.M. Best, Moody’s, Standard and Poors and Fitch Ratings of U.S.A, Baycorp Advantage of Australia, and Dominion Bond Rating Service of Canada.

Credit rating agencies are of immense help in taking the investment decisions by investors’ investment banks, booker dealers and governments. It helps the investors to have their investment in safe hands.

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