The NCD rating indicates whether the NCD is safe for investment or not. The NCD rating is a value that assesses the ability of the issuer to make its payments at the time of maturity/repayment.

Content:

1. NCD Rating Meaning
2. NCD Credit Rating Agency
3. NCD Rating Scale (NCD rating explained)

NCD Rating Meaning

The NCD rating indicates whether the NCD is safe for investment or not. The NCD rating is a value that assesses the ability of the issuer to make its payments at the time of maturity/repayment. If the company issuing the NCD has a positive cash flow and strong financials, the NCD will receive a higher rating.

It is mandatory for a company to obtain a credit rating for the issuance of NCD. The issuing company can obtain credit rating from one or more than one credit rating agency, A credit rating for a non-convertible debenture (NCD) reflects the issuer’s ability to meet its financial obligations. These obligations include payment of interest when due and paying maturity proceeds on time. There are seven SEBI-registered credit rating agencies in India. Of all, ICRA, CRISIL Rating, India Ratings and Research and CARE Ratings are more popular and regularly rate the NCD bonds.

The rating agencies assign the NCD ratings. The NCD rating indicates the level of risk and helps investors decide whether or not to invest in an NCD.

The NCD Rating shows mainly 3 indications:

1. Safety degree
2. Risk degree
3. Outlook

1. NCD Safety Degree ExplainedThis explains how safe it is to invest in an NCD. The Higher the rating, the safer it is to invest in an NCD. For example, an NCD with a rating of AAA will be considered the safest to invest as this indicates the highest safety in terms of debt repayment. Similarly, an NCD with CCC or C ratings will fall under the category of most unsafe investment.
2. NCD Risk Degree ExplainedA risk degree explains how risky it is to invest in a particular NCD. The higher the credit rating, the lower the credit risk and the lower the credit rating, the higher the credit risk.
3. NCD Outlook ExplainedA rating outlook provides insight to investors about expected rating changes during medium-term period of one to two years.A rating outlook can be “Stable”, “Positive”, or “Negative”:
   • Stable: The rating is likely to remain unchanged
   • Positive: The rating may be upgraded
   • Negative: The rating may be lowered

Let’s understand the safety degree, risk degree and outlook with an example:

Muthoot Finance NCD Tranche III is rated [ICRA] AA+/Stable by ICRA Limited.

1. This rating is considered to have a high degree of safety.
2. Very low credit risk.
3. Stable Outlook.

This NCD has a very low credit risk and indicates that investing in that NCD is safe. Although the ratings are not a recommendation to buy, sell or hold securities investors should make their own decisions.

Credit rating agencies rate non-convertible debentures (NCDs) to indicate the issuer’s ability to pay their debts. These ratings are based on several factors, such as the issuer’s financial strength, loan repayment history, and cash flow.

NCDs with a higher credit rating are considered less risky and offer a lower return. NCDs with lower credit ratings are considered riskier and offer a higher yield.

Some say that AAA-rated issues are the safest and that retail investors should avoid issues rated below AA/AA+.

NCDs are not backed by collateral, so the ratings assigned by rating agencies are important. Let’s understand the importance of Credit ratings in detail.

1.1 Importance of NCD Credit Rating

NCD Credit Ratings are important as it helps:

1. Assess the issuer’s ability to repay its financial obligations.
2. The rating agency evaluates the financial information based on the financials.
3. Assess the risk and return of the credit instrument.
4. Creates financial discipline within the company to maintain the rating of the financial instrument.
5. Expressed in symbols that are easier for an individual investor to understand.
6. Assigned by accredited institutions or experts.
7. Gives investors an indication of whether an investment in an instrument is worthwhile or not.
8. A good credit rating enhances the visibility and reputation of the issuing company.
9. A good credit rating makes it easy for companies to raise funds through loans.

1.2 Users of Credit Ratings

Credit ratings of companies are considered by various bodies or users and organizations, including:

1. Investment BanksInvestment banks use credit ratings to determine the risk of debt instruments or shares before offering them on the market.
2. LendersLenders evaluate ratings to assess the ability of a borrowing company to repay loans. A favourable rating reduces the risk of default and increases the likelihood of loan approval.
3. Retail/institutional investorsRetail and institutional investors use credit ratings to assess the risk and potential return of investing in a company’s securities, such as stocks or bonds. These ratings influence investment decisions and help investors determine the reliability of their investments.
4. Issuers of debt securitiesCompanies monitor their credit ratings to evaluate their creditworthiness and borrowing costs, manage financial strategies and make informed decisions.
5. Other companies/corporationsWhen conducting business transactions or partnerships, companies often check the credit ratings of other organizations involved. This helps them assess the potential partner’s financial stability and creditworthiness.

1.3 Importance/Advantages of NCD Credit Ratings (For Investors)

1. Better Investment DecisionIt helps investors decide whether the company is worth investing in.
2. Indication of Safety assuranceA higher credit rating assures the customers that the amount will be paid back on time with interest.
3. Help to select SecuritiesCustomers invest in high-rated instruments for repayment assurance and minimal risk.

1.4 Drawbacks/disadvantages of NCD Credit Ratings

1. Lack of Real timeCredit ratings may not accurately reflect a company’s current situation since they are based on historical financial data that does not reflect the current economic crisis.
2. No Attention on Future InformationCredit ratings are based on past performance and may not reflect future growth, resulting in inaccurate ratings for companies that have grown significantly since their inception.
3. NCD Ratings are not StaticCredit ratings get revised based on the company’s performance. A downgrade from previous ratings can impact the pricing of NCD in the secondary market. It is typical for the credit rating of a non-convertible debenture not to be revised by credit rating agencies despite unexpected events in the company, which can negatively impact investors.
4. Credit rating only acts as assuranceThe rating only serves as security and does not guarantee the investor a risk-free investment.

2. NCD Credit Rating Agency

Credit rating agencies (CRAs) rate companies and assign credit ratings to help investors and lenders understand the risk of lending to these companies.

Below is the list of credit rating agencies that rate the NCDs in India:

1. Credit Rating Information Services of India Limited (CRISIL)
2. Investment Information and Credit Rating Agency of India (ICRA) Ltd.
3. Credit Analysis and Research (CARE) Ltd.
4. Acuite Ratings & Research Ltd.
5. Brickwork Ratings India Private Ltd.
6. India Ratings and Research Pvt. Ltd.
7. INFOMERICS Valuation and Rating Private Ltd.

3. NCD Rating Scale (NCD rating explained)

The rating scales used by credit rating agencies range from ‘AAA’ to ‘D’.

The NCD rating chart explains the various NCD ratings in India provided by the different credit rating agencies. Here is a detailed explanation of every rating given by the agencies.

Note: CRISIL Ratings may use modifiers {“+” (plus) / “-” (minus)} with the rating symbols for the categories ‘CRISIL AA’ to ‘CRISIL C’. The modifiers reflect the comparative position within the category.

For example: The rating with + and – takes place in this order AA+, AA, AA- and A+

• AA+ has the highest degree of safety compared to AA and AA-.
• NCDs rated AA are safer than AA-.
• AA- is safer than A+

Key Takeaways

It is mandatory for all NCD issuers to obtain a rating for the NCDs from rating agencies. The credit rating provides information about a company’s ability to meet its liabilities. NCDs with a higher credit rating are considered less risky and offer a lower return. NCDs with a lower credit rating are considered riskier and offer a higher return. NCDs with a AAA rating have the highest degree of safety, while NCDs with a C rating or below are considered risky.

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Frequently Asked Questions

1. What is the NCD Rating?

A non-convertible debenture (NCD) rating is a measure of an issuer’s ability to fulfil its financial obligations, such as timely payment of interest and repayment of principal.

The NCD rating scales range from A to D with A denoting highest degree of safety and very low risk and D denoting default.

The NCD ratings also include outlook ratings like Positive, Negative or Stable indicating the likelihood of change in rating in the medium term. The outlook ratings are assigned to credit ratings from high to moderate degree of safety and not to ratings with default risk (i.e. from BB to D).

Credit rating agencies regularly evaluate NCDs to assign credit ratings.

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2. What is the best NCD rating?

AAA NCD Rating in India is considered the best rating, and investing in NCDs with a credit rating equal to or higher than AA is always good. An NCD rating of AA or higher indicates a higher degree of safety and a low credit risk.

3. What does the NCD rating mean?

In India, the rating of a non-convertible debenture (NCD) indicates the issuer’s ability to fulfil its payment obligation in terms of:

• Interest payments at maturity.
• Maturity proceeds.

NCDs are issued by companies to raise funds from the public and offer a fixed rate of return. They are fixed-interest instruments, usually issued by highly rated companies in the form of a public issue to generate long-term capital appreciation.

4. How safe are NCDs in India?

NCDs are considered to be safe for retail investors, but it’s important to check the credibility of the issuing company.

Secured NCDs are low-risk as they’re backed by assets, but unsecured NCDs offer no such protection. Investors must understand the risks before investing.

5. What are the top 3 rating agencies?

The top three credit rating agencies in India are CRISIL, CARE, and ICRA Limited.

There are four more credit rating agencies viz—Acuite, India Ratings, Brickworks Rating, Infomerics Valuation are registered with SEBI. However, the above three are more popular ones.

6. How many credit rating agencies are there in India?

India has seven credit rating agencies registered with SEBI:

• CRISIL
• CARE
• ICRA
• Acuité Ratings & Research Limited
• Brickwork Rating
• India Rating and Research Pvt. Ltd
• Infomerics Valuation and Rating Private Limited

7. What is the role of credit rating agencies in India?

Credit rating agencies (CRAs) evaluate companies’ creditworthiness based on their income, credit history, and financial obligations.

They also research the economy, including industries and companies. CRAs provide investors with essential information on issuers’ creditworthiness and their debt. The CRAs use letter codes and symbols to classify entities and instruments, where a higher rating indicates a more attractive investment opportunity.

8. Who controls credit rating agencies in India?

SEBI controls the credit rating agencies in India.

Credit rating agencies play a critical role in the Indian financial system. They provide a benchmark for financial market regulations. They are regulated by the Securities and Exchange Board of India (SEBI) through its SEBI (Credit Rating Agencies) Regulations, 1999, and circulars. SEBI has the power to authorize and regulate credit rating agencies under the SEBI Act, of 1992.

9. Which is the longest-established credit rating agency in India?

Incorporated in 1988, CRISIL Rating Agency is India’s first credit rating agency.

CRISIL was promoted by the erstwhile ICICI Ltd, UTI, and other financial institutions. The first Chairman and Managing Director of CRISIL were Mr. N Vaghul and Mr. Pradip Shah, respectively.

10. Is credit rating mandatory for the issue of debentures?

Yes, credit rating is mandatory for the public issue of debentures.

A company is required to obtain the credit rating for the NCD it intends to issue. Without a credit rating, a company cannot issue NCDs. The companies are required to put the credit rating in the offer documents that indicate the degree of safety and risk the NCD carries.

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Maria Stanly

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