A credit rating agency is an independent powerful company that assesses the financial position of the institutions or issuers of debt instruments. They give a rating based on how good a company is in paying back the debts or loan. Credit rating agencies give a score to private individuals, businesses and governments. The issuers, investors and business partners depend upon the ratings and data analysis of these agencies in measuring the overall stability and strength of a company.
There is a risk associated with lending money to a person. Banks take that risk, and expect some kind of a surety for the repayment of that amount. The same applies to a country as well. If a country is in financial crisis and seeks for the help from the bank; the banks must be sure that they can get their money back. The banks get this surety from the data analysis done by credit rating agencies. For example, in the past few years, the European financial market has faced trouble in borrowing money from the international market due to the less ratings given by credit rating agencies. These agencies have downgraded the countries like Portugal and Greece in terms of the repayment of money.
The ratings given by these agencies also impacted the rate of interest a company pay for a loan. The companies with good rating usually get money at a low interest, whereas the companies with less or bad ratings gets the money at a higher interest. The credit rating agencies gives the rating on the basis of collecting all kinds of information on businesses, companies and countries. In return, the agencies get paid by these entities for getting their bonds or shares rated.
There are many credit rating agencies available all over the world, but the top three are: Fitch, Standard & Poor’s and Moody’s. These agencies give a rating in different ways. The best rating is AAA, which means that one can borrow money at a very low interest. Sometimes, the ratings also depend upon the company’s and countries potential of developing economically in the future.
The ratings given by these agencies are really helpful in the assessment to lend money. However, they are not always accurate. Criticism of these agencies has come up in the past. They have admitted that they have made mistakes in their rating process during 2008 which eventually led to the crisis.
There is a difference of opinion regarding the importance of credit rating agencies. As per some financial experts, they are required. Some say, they are not needed at all. The discussion is on the go about the relevance of credit rating agencies.
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