Credit Rating

Investments

Credit ratings evaluate the creditworthiness of debt instruments (bonds, debentures) issued by companies or governments. In India, CRISIL, ICRA, CARE, and INDIA Ratings are the main rating agencies. Ratings range from AAA (highest safety) to D (default). Always invest in AA or higher rated debt instruments.

In detail

Rating scale (CRISIL/ICRA):nAAA: highest safety, lowest risk. Government, top PSUs, top-rated companies.nAA: high safety. Minimal difference from AAA in practice.nA: adequate safety. Somewhat more risk.nBBB: moderate safety. Investment grade minimum.nBB and below: speculative grade. High risk.nD: Default or expected to default.nnFor retail investors:nDebt mutual funds: fund house manages credit analysisnDirectly buying NCDs or bonds: only buy AAA or AA-rated from well-known issuersnHigh yield (BB or below): avoid unless you are an experienced credit investor

Formula

Credit spread = Yield on rated bond - Yield on equivalent government bondnAAA corporate vs G-Sec (same tenure): spread 0.5-1%nAA corporate: 1-1.5% spreadnBBB: 2-3% spreadnBelow investment grade: 4-8%+

Real-life example

🇮🇳 India example

CRISIL downgrades DHFL from AA to BBB+ in early 2019. Any informed investor should have exited DHFL deposits and NCDs at this point. Within months: DHFL defaulted, investors lost principal. The rating downgrade was a warning sign. Always check credit ratings before investing in corporate bonds, company FDs, or NCDs.

Frequently asked questions

Are company FDs safe if the company has a AAA credit rating? ▼

Safer than unrated, but company FDs are NOT covered by DICGC insurance (only bank FDs up to Rs 5L are insured). Even AAA companies can face financial distress. For most retail investors: bank FDs (DICGC insured) or AAA-rated debt mutual funds are safer than company FDs -- even from highly rated companies.