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Unit 10: Credit Rating and Consumer Finance

10.2 Credit Rating Process Notes

Credit ratings are calculated from financial history and current assets and liabilities. Typically,
a credit rating tells a lender or investor the probability of the subject being able to pay back a
loan. However, in recent years, credit ratings have also been used to adjust insurance premiums,
determine employment eligibility, and establish the amount of a utility or leasing deposit.
A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest
rates, or the refusal of a loan by the creditor. The credit rating process can be categorized in four
steps namely:
1. Receiving the completed application form: This is the first step in the rating process. The
company that wants it to achieve a credit rating approaches the appropriate credit rating
agency and submits the completed application form. As soon as the agency receives the
completed form, the movement towards the next step starts.
2. Representatives visiting the company: Thereafter, the representatives of the credit rating
agency visit the company that requested for the rating.
3. Analysts having a short discussion with the management of the company: This step
ensures the agencies about the vision and operational nitty gritties of the company and
helps the credit rating agency in the preparation of the credit report.

4. Preparation of a rating report, assigning a rating and sending the copy of the report to the
company and NSIC: As the last step of the rating process, the rating report is prepared.
Under this report, the rating is assigned and copy of the same is sent to the company as
well as the NSIC for further use of the prospective investors.

Rating Scale

Your rating will reflect two components, Financial Strength and Performance Capability. Ratings
will be assigned on the following rating scale:

Example: Financial Strength

High Moderate Low
Performance Capability

Highest SE 1A SE 1B SE 1C
High SE 2A SE 2B SE 2C
Moderate SE 3A SE 3B SE 3C

Weak SE 4A SE 4B SE 4C
Poor SE 5A SE 5B SE 5C

A company with high Performance Capability and high Financial Strength will be rated 'SE2A',
while one with weak Performance Capability and low Financial Strength will be rated 'SE4C'.

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