Credit Rating Agencies in India- Credit ratings agencies operate behind the scenes in India’s financial system but their impact is enormous. They don’t lend money, manage savings nor do they facilitate the trade in stocks. All they do is sell a single product-an independent view on the probability of a borrower repaying their debt. That view, known as a credit rating, can send currencies sliding, shift bond yields and attract or repel billions of dollars in capital.
Their influence was evident this August when S&P Global Ratings raised India’s sovereign rating to BBB from BBB– for the first time in 18 years. Markets responded immediately. The rupee strengthened against the dollar, and yields on 10-year government bonds fell. The move reinforced how a single rating decision from a trusted agency can ripple through the entire economy.
What Credit Rating Agencies Actually Do
CRAs rate the creditworthiness of governments, corporates, and banks, as well as individual instruments. Their ratings range from
AAA — highest safety
AA / A / BBB — investment grade
BB and below – speculative
D — default
Investors use these ratings as shorthand to determine risk, and borrowers require them to access capital at competitive rates. A good rating opens the doors to more international capital and lowers borrowing costs, while a poor one raises the specter of default and reduces the pool of potential investors.
Most institutional investors, such as mutual funds, pension funds, and insurance companies, have strict rules barring them from investing in bonds below a certain grade. This gives CRAs enormous influence over who gets funded and on what terms.
How CRAs Make Money
For all their influence, the business model of the rating agencies is uncomplicated. There are two key sources of revenue:
- Per-Transaction Fees
Borrowers have to pay an upfront fee when they seek a rating for a new bond, loan or market issuance. This revenue is linked to the volume of new borrowing.
CRA revenues increase when capital markets are hot, as more issuances hit the market. This line of income then drops off steeply when the markets cool.
- Recurring Surveillance Fees
Once a rating has been assigned, the borrower pays an annual fee for monitoring and updating the rating until maturity. These fees are smaller but quite stable and predictable.
Agency services have diversified over the years to include:
ESG ratings
research and macroeconomic reports,
Risk analytics and modeling tools.
Advisory and benchmarking services.
These companies provide consistent recurring revenue, but earn lower margins than ratings because of competition from consulting firms and analytics companies.
Why Their Margins Stay High
They adopt an asset-light model. Rating agencies don’t need factories, inventory, and heavy infrastructure. Their major expenses are:
analyst salaries,
data systems,
compliance costs.
The result is high operating margins, often more than 30%, and good cash flows. For example, CARE Ratings has historically paid out almost half its profits as dividends. Business growth also needs very little capital. More deals and more analytical talent are enough.
The Trust Dilemma
The CRA model’s biggest problem is that it has an inbuilt conflict of interest, with the rated entity paying the agency. This structure has led to its failures across the world.
The global financial crisis of 2008 had shown how American rating agencies accorded high grades to risky mortgage products. DHFL defaulted in 2019 just months after getting a AAA rating from CARE, again causing damage to market trust.
In this line, the actual product issuing ratings is credibility, and it is valuable only insofar as investors trust the rating agency. Once broken, trust is extremely hard to regain.
Why Three Agencies Dominate India
Although there are several SEBI-registered CRAs, more than 95% of the Indian market is dominated by three players, namely CRISIL, ICRA, and CARE Ratings. Their dominance arises from:
reputation,
long-standing market relationships,
conservative methodologies,
investor confidence, and high switching costs for borrowers. Many regard CRISIL, partly owned by S&P Global, as the most credible. Hence, its ratings carry more weight with investors. The Bottom Line Credit rating agencies sit quietly beneath the financial architecture of India, yet their influence is unparalleled. Their opinions direct global capital, affect borrowing costs and shape investor decisions. As the credit markets continue to expand in India, as corporate borrowing increases at a rate faster than GDP, the importance of CRAs will grow correspondingly. But their future rests on one fragile base: trust. Without that, their business-and the markets they support-cannot work.
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