Credit Rating

CHAPTER 1: INTRODUCTION TO CREDIT
RATING

1.1. Origin of Credit Rating

When someone relies on a ‘promise to pay’, the credit worthiness of those making the promise is of utmost important to the persons expecting the payment. Credit Rating provides an independent way of judging credit worthiness of the persons who had made the promise to pay. Since it judges the credit quality and risk of default, it plays an important role in today’s financing decision making.

The origin of credit rating can be traced from when it was done for first time by a mercantile credit rating agency set up in New York in the year 1841 where the ability of merchants to pay there financial obligations were rated. Later on, it was taken over by Robert Dun. This agency published its first rating guide in 1859.The second agency was established by John Bradstreet in 1849 which later merged with the 1st agency to form Dun & Bradstreet in 1933, which became the owner of Moody’s Investor’s Service in 1962. In 1900, John Moody laid stone of Moody’s Investor’s Service by rating Railroad Companies and publishing ‘Manual of Railroad Securities’.

In early 1920s, Credit Rating industry expanded when Poor’s Publishing Company published its 1st rating guide in 1916.Subsequently, Fitch Publishing Company and Standard Statistics Company were set up in 1924 and 1922 respectively. Poor & Standard merged together in 1941 to form Standard & Poor. However, between 1924 and 1970, no major new Credit Rating Agencies were set up.

But since 1970, a number of Credit Rating Agencies have been set up all over the world including countries like Malaysia, Thailand, Korea, Australia etc.

India was perhaps the 1st amongst developing countries to set up a Credit Rating Agency in mid of 1980s. CRISIL, the first Credit Rating Agency in India, was set up in 1988.It was followed by ICRA established in 1991 and CARE in 1994.At present there are 4 major rating agencies in India- CRISIL, ICRA,CARE and FITCH.

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