Advantages of Credit Rating
Different benefits accrue from use of rated instruments to
different class of investors or the company. These are explained as under:
A. Benefits to Investors
1. Safety of investments. Credit rating gives an idea in advance to the investors about the degree of financial strength of
the issuer company. Based on rating he decides about the
investment. Highly rated issues gives an assurance to the
investors of safety of Investments and minimizes his risk.
2. Recognition of risk and returns. Credit rating symbols
indicate both the returns expected and the risk attached to a particular issue. It becomes easier for the investor to
understand the worth of the issuer company just by
looking at the symbol because the issue is backed by the
financial strength of the company.
3. Freedom of investment decisions. Investors need not seek
advise from the stock brokers, merchant bankers or the
portfolio managers before making investments. Investors
today are free and independent to take investment decisions
themselves. They base their decisions on rating symbols
attached to a particular security. Each rating symbol assigned to a particular investment suggests the creditworthiness of
the investment and indicates the degree of risk involved in
4. Wider choice of investments. As it is mandatory to rate
debt obligations for every issuer company, at any particular time, wide range of credit rated instruments are available for making investment. Depending upon his own ability to
bear risk, the investor can make choice of the securities in which investment is to be made.
5. Dependable credibility of issuer. Absence of any link
between the rater and rated firm ensures dependable
credibility of issuer and attracts investors. As rating agency has no vested interest in issue to be rated, and has no
business connections or links with the Board of Directors.
In other words, it operates independent of the issuer
company, the rating given by it is always accepted by the
6. Easy understanding of investment proposals. Investors
require no analytical knowledge on their part about the
issuer company. Depending upon rating symbols assigned
by the rating agencies they can proceed with decisions to
make investment in any particular rated security of a
7. Relief from botheration to know company. Credit agencies
relieve investors from botheration of knowing the details
of the company, its history, nature of business, financial
position, liquidity and profitability position, composition
of management staff and Board of Directors etc. Credit
rating by professional and specialised analysts reposes
confidence in investors to rely upon the credit symbols for
taking investment decisions.
8. Advantages of continuous monitoring. Credit rating
agencies not only assign rating symbols but also
continuously monitor them. The Rating agency downgrades
or upgrades the rating symbols following the decline or
improvement in the financial position respectively.
B. Benefits of Rating to the Company
A company who has got its credit instrument or security rated is benefited in the following ways.
1. Easy to raise resources. A company with highly rated
instrument finds it easy to raise resources from the public. Even though investors in different sections of the society
understand the degree of risk and uncertainty attached to a
particular security but they still get attracted towards the highly rated instruments.
2. Reduced cost of borrowing. Investors always like to make
investments in such instrument, which ensure safety and
easy liquidity rather than high rate of return. A company can reduce the cost of borrowings by quoting lesser interest on
those fixed deposits or debentures or bonds, which are
3. Reduced cost of public issues. A company with highly rated instruments has to make least efforts in raising funds
through public. It can reduce its...
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