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What Is Credit Rating?

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Credit rating estimates the credit worthiness of an individual, corporation or even a country. In other words a credit rating helps a lender or investor the probability of the subject (borrower) being able to pay back a loan in full and on time. A simple alphanumeric symbol is normally used to convey a credit rating. Credit rating agency (CRA) evaluates and prepares the overall credit history of a borrower at a request of the lender. A credit rating is not a recommendation to buy, sell or hold a debt instrument. It is an opinion expressed by an independent professional organization, after making a detailed study of all relevant factors. Such an opinion will be of great assistance to investors in making investment decisions. It also helps the issuers of debt instruments to price their issues correctly and to reach out to new investors.

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In India, credit rating agencies are regulated by (Stock Exchange Board Of India) SEBI. To protect the interest of investors, SEBI has mandated that every credit rating agency shall, during the lifetime of the securities rated by it, continuously monitor the rating of such securities and carry out periodic reviews of all published ratings and disclose the revised ratings.

What do the various credit rating symbols mean?

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SYMBOL
(Rating Category)
DESCRIPTION
(With Regard to the likelihood of meeting the debt obligation on time)
AAA Extremely Safe (Highest Rating)
AA High Safety : Very strong capacity to meet financial commitments.
A Adequate Safety : Strong capacity to meet financial commitments.
BBB Moderate Safety : Adequate capacity to meet financial commitments.
BBB (minus) This is the lowest rating before non-investment grade
BB Inadequate Safety
B High Risk
CCC Vulnerable and dependent to meet financial commitments
CC Highly Vulnerable
C Substantial Risk
D Default

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