When investing in corporate bonds, one of the first questions to ask is how likely the issuer is to repay its debt on time. ICRA ratings can offer answers to that question by giving an independent rating opinion on the credit ratings of companies and debt instruments. They provide a basis for assessing the credit risk but will not forecast investment returns or ensure repayment. The guide explains ICRA ratings, its importance, how it is assigned and how it differs from CRISIL ratings.
What are ICRA Ratings?
ICRA ratings are independent opinions on the creditworthiness of companies, financial instruments, and debt issuers. ICRA Limited is one of the leading credit rating agencies of India and is registered with Securities and Exchange Board of India (SEBI). The agency performs a routine evaluation procedure that reflects financial and non-financial criteria. They assess the issuer’s ability and willingness to meet its financial obligations on time.
How Does the ICRA Rating Process Work?
Here's how the ICRA rating process works:
Step 1: Rating Mandate
The issuer engages ICRA for a credit rating for a proposed or existing debt instrument, such as a corporate bond or non-convertible debenture (NCD).
Step 2: Information Collection
ICRA collects comprehensive information, including:
- Audited financial statements
- Business plans and projections
- Debt obligations
- Cash flow forecasts
- Industry reports
- Discussions with the company's management
Step 3: Detailed Credit Assessment
The analytical team evaluates multiple factors, including:
Business Risk
- Industry outlook
- Market position
- Competitive strengths
- Business diversification
Financial Risk
- Revenue and profitability
- Leverage
- Debt servicing capability
- Cash flows
- Liquidity
Management and Governance
- Management quality
- Corporate governance
- Financial policies
Step 4: Independent Rating Committee
The analyst's findings are presented to a rating committee. The committee reviews the evidence, discusses potential risks and assigns the final credit rating.
Step 5: Rating Publication
Once finalised, the rating is shared with the issuer and published along with a detailed rating rationale. Investors can review this rationale to understand the factors supporting the assigned rating.
Step 6: Continuous Surveillance
Assigning a rating is not the end of the process. ICRA continuously monitors the issuer's financial health and business performance.
ICRA Credit Rating Scale Explained
Understanding the rating scale helps investors compare bonds with different levels of credit risk.
ICRA Rating | Meaning | Credit Risk |
ICRA AAA | Highest degree of safety regarding timely servicing of financial obligations | Lowest |
ICRA AA | High degree of safety | Very Low |
ICRA A | Adequate degree of safety | Low |
ICRA BBB | Moderate degree of safety (lowest investment-grade category) | Moderate |
ICRA BB | Moderate risk of default | Moderately High |
ICRA B | High credit risk | High |
ICRA C | Very high credit risk | Very High |
ICRA D | Default or expected to be in default | Extremely High |
Why ICRA Ratings Matter for Investors
Credit ratings are not investment recommendations, but they are valuable tools for assessing risk. They help investors compare issuers consistently and understand the financial strength behind a bond issue.
Simplify credit risk assessment
Analysing financial statements can be time-consuming, especially for retail investors. ICRA ratings provide an independent opinion that makes comparing different issuers easier.
Support informed investment decisions
Ratings help investors narrow down investment choices before carrying out deeper research. Instead of selecting bonds based only on coupon rates, investors can also consider the issuer's repayment capability.
Help improve portfolio diversification
Investors can use ratings to identify debt instruments with different levels of credit risk and construct a portfolio that aligns with their risk tolerance.
Improves transparency
Every published rating includes a detailed rationale explaining the key factors behind the assigned rating.
Reading this report can provide valuable insights into an issuer's:
- Business strengths
- Financial risks
- Industry outlook
Why ICRA Ratings Matter for Issuers
For companies raising funds through bonds, ICRA ratings play an important role in building credibility with investors.
A recognised credit rating provides an independent assessment of the issuer's financial strength, making it easier for potential investors to evaluate the associated credit risk.
Strong ratings may improve market confidence and broaden access to institutional investors such as mutual funds, insurance companies and pension funds that often consider credit quality when selecting debt investments.
How to Check the ICRA Rating of a Company or Bond
Here's how to check the ICRA rating of a company or bond:
Step 1: Visit the Official ICRA Website
Go to the official ICRA website and open the ratings section. This contains the latest ratings assigned to companies and debt instruments.
Step 2: Search for the Issuer or Instrument
Enter the company name or debt instrument in the search bar. If available, you can also search using the ISIN or other identifying details.
Step 3: Check the Current Rating
Review the latest assigned rating and confirm whether it has been:
- Reaffirmed
- Upgraded
- Downgraded
- Placed on Rating Watch
Step 4: Read the Rating Rationale
The rating rationale explains why a particular rating has been assigned. It discusses factors such as:
- Business profile
- Financial performance
- Liquidity
- Debt levels
- Industry outlook
- Key risks
Step 5: Cross-Check with Other Disclosures
Along with the rating report, review the company's financial statements, bond prospectus and stock exchange disclosures. Combining multiple sources of information helps investors develop a more balanced understanding of credit risk.
ICRA vs CRISIL: What's the Difference?
The table below shows the difference between ICRA and CRISIL.
Feature | ICRA | CRISIL |
Established | 1991 | 1987 |
Full Form | Investment Information and Credit Rating Agency | Credit Rating Information Services of India Limited |
Global Association | Affiliate of Moody's Investors Service | Majority-owned by S&P Global |
Primary Services | Credit ratings, research and risk assessment | Credit ratings, research, risk analytics and advisory |
Rating Scale | Aaa to D | AAA to D |
Regulated By | SEBI | SEBI |
Coverage | Corporates, financial institutions, infrastructure, structured finance and government entities | Similar coverage across multiple sectors |
SEBI's Role in Regulating Credit Rating Agencies
Securities and Exchange Board of India (SEBI) is the regulatory body that governs the activities of credit rating agencies like ICRA, ensuring that the debt markets in India are transparent, accountable and protect investor interests.
In accordance with the SEBI (Credit Rating Agencies) Regulations, registered credit rating agencies are required to adhere to governance principles, be independent and publish their methodologies, and also periodically review their existing ratings. These requirements help to achieve uniform standards and minimise conflicts of interest.
The SEBI also mandates the rating agencies to issue rating rationales, notify investors on the rating changes promptly, and undertake regular monitoring during the life of a rated instrument.
Conclusion
ICRA ratings help bond investors assess the creditworthiness of companies and debt instruments by offering an independent view of repayment capability. While they are a useful indicator of credit risk, they should not be treated as a guarantee of repayment or the sole basis for investment decisions. Investors should also review financial statements, issuer disclosures and their own risk tolerance before investing.
Frequently Asked Questions (FAQs)
How are ICRA bond ratings assigned?
ICRA rates an issuer based on an assessment of their financial strength, debt repayment ability and business profile and industry outlook.
Is an ICRA AAA rating a guarantee of repayment?
No. An ICRA AAA rating means the creditworthiness has the highest possible quality but does not ensure payments or a risk free investment.
What is the difference between an ICRA rating and a CRISIL rating?
They both evaluate the credit risk, but are two distinct entities under SEBI and have different methods of calculation and different ownership structures.
Should investors rely only on ICRA ratings before investing in bonds?
No, ICRA ratings should be read in conjunction with the investor's financial analysis and the issuer's disclosures and investment objectives.
Does every corporate bond have an ICRA rating?
Depending on the issuer, corporate bonds can be rated by ICRA or any other credit rating agency registered with the SEBI.
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