How Credit Rating Agencies Work in India
A credit rating is an opinion — not a guarantee. Understanding who produces that opinion, how, and what incentives are at play gives you a much more useful mental model than simply treating AAA as "safe" and B as "risky." This article walks through how the four main Indian rating agencies work, and how to use their output sensibly.
The four main agencies
India has four SEBI-registered credit rating agencies that dominate the market:
| Agency | Global affiliate | Founded | Notable for |
|---|---|---|---|
| CRISIL | S&P Global (majority stake) | 1987 | Oldest Indian agency; large corpus of SME and structured finance ratings |
| ICRA | Moody’s (majority stake) | 1991 | Strong in financial sector (banks, NBFCs) and infrastructure |
| CARE Ratings | Independent (Caregroup) | 1993 | Wide coverage across mid-market corporates; also active in bank loan ratings |
| India Ratings | Fitch Group (wholly owned) | 2011 (rebranded from Fitch India) | Strong in structured finance and project finance; granular methodology disclosures |
Two smaller agencies — Brickwork Ratings and Infomerics — also operate in the market. All must be registered with SEBI under the Credit Rating Agencies Regulations, 1999.
The rating scale — and how to read it
All four agencies use a broadly similar long-term rating scale, though the notation differs slightly:
| Category | CRISIL | ICRA | CARE | India Ratings | What it means |
|---|---|---|---|---|---|
| Highest safety | AAA | [ICRA]AAA | CARE AAA | IND AAA | Lowest default risk; strong capacity to service debt |
| High safety | AA+, AA, AA− | [ICRA]AA+/AA/AA− | CARE AA+/AA/AA− | IND AA+/AA/AA− | Very low default risk; slight vulnerability to long-term conditions |
| Adequate safety | A+, A, A− | [ICRA]A+/A/A− | CARE A+/A/A− | IND A+/A/A− | Low default risk; more susceptible to adverse conditions than AA |
| Moderate safety | BBB+, BBB, BBB− | [ICRA]BBB+/BBB/BBB− | CARE BBB+/BBB/BBB− | IND BBB+/BBB/BBB− | Moderate default risk; investment grade but with observable vulnerabilities |
| Speculative grade | BB and below | [ICRA]BB and below | CARE BB and below | IND BB and below | Material default risk; below investment grade |
| Default / near-default | D | [ICRA]D | CARE D | IND D | In default or expected to default imminently |
The BBB−/BBB threshold is the investment grade cutoff — most institutional mandates (insurance companies, pension funds) cannot hold bonds rated below investment grade. A downgrade from BBB− to BB+ is therefore particularly significant because it triggers forced selling by institutional holders, which can depress prices sharply.
The issuer-pays model: understanding the conflict
Here is the fundamental tension in the credit rating business: the issuer pays for its own rating. A company that wants to issue bonds hires and pays a rating agency to assess its creditworthiness. The agency’s revenue depends on issuers continuing to engage it.
This is not a secret — it is simply how the market works globally. But it creates a structural incentive for agencies to be generous with ratings, particularly for issuers who are large, repeat customers.
SEBI has addressed this through regulations requiring agencies to follow documented methodologies, maintain rating committees with clearly defined responsibilities, and disclose all rating actions publicly within 24 hours. Agencies also face regulatory review if their ratings systematically fail to predict defaults.
The practical implication for investors: do not rely solely on the rating. Use it as one input among several.
How a rating is assigned
The process typically follows these steps:
- Mandate and data collection: The issuer engages the agency and submits financial statements, business plans, management presentations, and sometimes allows a site visit.
- Analyst assessment: A lead analyst reviews the financials, competitive position, industry dynamics, management quality, and debt structure. They prepare an internal rating recommendation.
- Rating committee: The recommendation goes to a rating committee — typically 3–5 senior analysts and managers — who debate and vote on the final rating. The issuer cannot sit in on this meeting.
- Issuer notification: The issuer is told the rating before it is published. They can provide additional information or appeal — but the committee makes the final call.
- Publication: The rating and a rationale document are published on the agency’s website and filed with SEBI. Investors can access all rating actions publicly.
Surveillance: ratings are not permanent
A rating assigned today is not a fixed label. All rated instruments are under surveillance — the agency monitors the issuer’s performance and can take action at any time:
- Annual review: Every rated instrument is formally reviewed at least once a year, triggered by the annual report filing.
- Event-based review: Significant events — a large acquisition, a regulatory penalty, a covenant breach, a major NPA disclosure — can trigger an immediate review outside the annual cycle.
- Rating watch / CreditWatch: If the agency sees a potential change but needs more information, it places the rating on "watch" (positive, negative, or developing). This signals to investors that a rating action may be imminent.
- Outlook: A stable/positive/negative outlook reflects the agency’s view of the likely rating direction over 12–24 months, absent surprises.
Tracking rating actions over time — not just the current rating — is often more informative than the snapshot rating. A bond that has been reaffirmed at AA three times in a row is sending a different signal from one that was AA, put on watch negative, then downgraded to AA−.
You can track rating action history for any issuer on our ratings page.
Rating shopping: what it is and how to spot it
Because issuers choose and pay their rating agency, they can — in theory — approach multiple agencies and only publish the most favourable one. This is called rating shopping.
SEBI’s regulations now require issuers to disclose all ratings obtained, including those they chose not to use. But vigilance is still warranted. Some signals that warrant a closer look:
- An issuer that recently switched agencies (especially from a stricter to a more lenient one)
- A bond rated by only one agency when comparable peers have two ratings
- A significant difference between ratings from two agencies on the same issuer (a split rating)
None of these is conclusive — there are legitimate reasons for single ratings and agency switches. But they are worth noting.
What credit ratings cannot tell you
A credit rating answers one question: what is the likelihood that this issuer will default on this obligation? It does not answer:
- Recovery rate: If the issuer does default, how much will you get back? A D-rated bond from an issuer with valuable assets may return 60 paise on the rupee. A D-rated bond with no collateral may return near zero. The rating does not distinguish these.
- Market price / yield: An AAA bond can trade at a very low yield or a very high yield depending on supply and demand. The rating does not imply a specific price.
- Future conditions: Ratings are based on current and historical financials plus near-term projections. They cannot predict a once-in-a-decade macro shock, a sector-specific regulatory change, or a fraud.
- Suitability: A AAA bond is not "suitable" for every investor — it may not meet your return requirements, liquidity needs, or tax situation. Suitability is a personal financial planning question, not a rating question.
Related: Reading a CRISIL rating action · Secured vs unsecured NCDs · Browse rating actions →