Benefits of Credit Rating

The beneficiaries of Credit rating are investors, companies and intermediaries benefited in the following ways:-

Benefits to Investors

Safety

Investors get an idea about the degree of financial strength of the issuer company through credit rating.

Risk and Returns

Credit rating indicates the degree of risk and possibility of returns on debt instruments. The indication (symbol) helps the investor to take decision for making investment on such instruments.

Investment Decisions

Credit rating symbol expresses the creditworthiness of the instruments as a layman can easily understand about the risk & return status of such instruments. Hence, he can take his own decision instead of seeking any advice from the stock brokers.

Investment Choice

Commonly, there are two different types of investors i.e., risk taker and risk averter. The level of risk taking is different for different investors. Hence, the investor can choose the securities for his investment based on his risk bearing capacity.

Easy Perception

All debt instruments are rated mandatorily. No analytical knowledge is required to make investment on debt instruments. Therefore, investors can make investment easily and quickly.

No Need of Issuing Company Details

Credit rating agencies conduct detailed investigation about the issuing companies’ details like nature of business, financial position, liquidity and profitability position before evaluating the instruments issued by them. Therefore, investors need not bother about the company.

Monitoring System

The constant monitory system is followed by credit rating agencies after grading the instruments.

Benefits to the Company

Quick Mobility of Fund

Highly rated instruments indicate the ability of the yield of the instruments. Normally, investors are interested to invest in this kind of instruments. Hence, the issuing company can mobilize fund quickly through the issue of such type of securities.

Lower Cost of Debt

The highly rated instruments are quoted with lower rate of interest. So, the company can get cheaper source of debt fund.

Reducing Issue Expenses

The rating itself is an advertisement for highly rated instruments. Hence, the issuing company has no need to spend for publicity of such instruments. Therefore, the issuing cost can be reduced to the issuing company.

Increasing Goodwill

The goodwill of the company would increase when their instruments get high rate. The high rated instruments build good image of the company in the eyes of stakeholders.

Motivation for Growth

The promoters of the company with highly rated instruments are motivated to expand their operations and move towards the growth path of the company.

Recognition

Credit rating is a way for getting opportunity to recognize the new companies or unknown companies.

Benefits to Intermediaries

The less effort is sufficient to approach the investors for the selection of instruments by the intermediaries in case of highly rated instruments.

Limitations of Credit Rating

Credit rating suffers from the following limitations:

Hidden Information

Investors can get loss when the company does not disclose the important information to the investigation team of credit rating agency.

Non-Consideration of External Factors

The external factors like economic, political, environment and government policies which may affect the creditworthiness of the firm are not considered while evaluating the instruments. Generally, the rating is based on historic data which may mislead the investors.

No Guarantee

Rating is simply an opinion about the capability of the company but it is not a certificate or guarantee of the credit rating agency.

Biased

The quality of the rating may be affected due to the personal bias of the investigating team.

Difference in Rating Grades

Investors get confused due to different rating scale for the same instrument given by different rating agencies.