Credit Rating

Credit Rating is an independent opinion on the creditworthiness of a debt instrument or issuer — the probability of timely interest and principal repayment. India has 7 SEBI-registered Credit Rating Agencies (CRAs): CRISIL, ICRA, CARE, India Ratings, Brickwork, Acuité (SMERA), and Infomerics.

Rating scale (long-term):

• AAA — highest safety. Sovereign-like.
• AA+, AA, AA− — high safety.
• A+, A, A− — adequate safety.
• BBB+, BBB, BBB− — moderate safety (lowest investment grade).
• BB and below — sub-investment grade (“junk”).
• D — default.

INR example: A 3-yr AAA-rated NBFC bond yields ~8.2%, an AA-rated NBFC bond at the same tenor yields ~9.0%, a BBB-rated bond ~10.5%. The spread is compensation for higher default probability. CRISIL’s 1-yr cumulative default rate for AAA = 0%; for AA = 0.05%; for A = 0.50%; for BBB = 2.5% (long-term averages).

When to use: Always check the credit-rating composition of a debt fund before investing. Credit-risk funds (BBB-heavy) can lose 5–15% NAV on rating downgrades (e.g. IL&FS 2018, DHFL 2019, Franklin debt fund crisis 2020).

SEBI note: SEBI mandates monthly disclosure of credit-rating distribution in debt-fund factsheets. Watch out for rating actions (downgrades, “negative outlook”) on top issuers in your fund.

Related terms: YTM (Yield to Maturity), Modified Duration, D/E Ratio.