What is ICRA Rating and how important is it while making an investment decision?

Every investor is looking for two basic criteria before making investment decision: Rate of Return and Safety of Investment. Although it is true that high return involves high risk, still investors want to take the ‘informed’ decision. However, individual investors do not have professional access to information about the financial aspects of the NBFCs (Non-Banking Financial Companies). Here the role of credit agencies comes into the picture. ICRA is a similar credit rating agency in India. Earlier ICRA rating was known as the Investment Information and Credit Rating Agency of India. It rates the Fixed deposit and other financial instruments with the help of professional experts and access to financial statements of the company. They also conduct the audit before they award a particular rating to the fixed deposit.

ICRA Rating of Fixed Deposit

Any financial institutions accepting Fixed deposits from the public can apply for a rating from ICRA. Based on financial statements, audit reports,and market intelligence, ICRA provides the following rating to the Fixed deposits:

MAAA is the highest possible rating the fixed deposit can avail. It indicates the lowest credit risk and highest credit quality. If you are fixed deposit investor seeking the highest safety of your investment, you should insist on MAAA rating for your fixed deposit. NBFCs like Bajaj Finance offer ‘better than bank interest rate’ and ‘bank-like safety’ with MAAA rating from ICRA.

MAA is also low risk and high credit quality rating. However, the credit quality is one notch lower than

MAAA rated financial instruments.

MA indicates that your investment carries average credit risk and adequate credit quality. Usually, MA rated FDs offer a slightly higher FD interest rate than MAAA or MAA rated fixed deposits.

MB rated financial instrument carries a high degree of credit risk. The credit quality is essentially inadequate. The investors seeking the safety of the capital should avoid such investments.

MC rated financial instrument carries high credit risk, and credit quality is ‘risk-prone.’

MD rating indicates the very low possibility of the return of your money. It is the lowest credit quality of the investment. Needless to mention, MD rated financial instruments are not worth to invest.

Above ratings are further fine-tuned with Plus (+) or Minus (-) modifiers. For example, MAAA+ shows better quality rating than MAAA. Similarly, MAAA- is a better rating than MAA, but lower than MAAA.

Importance of ICRA rating

The investors of fixed deposits are attracted to higher interest rates. It is a widespread perception that fixed deposit is always a safe investment. However, it is not the case with every FD. In the recent past, there are several instances of default by financial institutions. In such situations, ICRA ratings can come to your rescue. Before investing in Fixed Deposit, it is strongly recommended to verify the credit rating of the financial institution that offers a fixed deposit.

Credit Quality is Not Optional

When you opt for the investment in fixed deposit, you expect three points: Safety of principal amount, regular repayment of interest and a higher rate of interest. While a little bit lower interest rate is still acceptable, the safety of the principal cannot be compromised. The difference inthe interest rate of 0.5% or so does not make sense if you take too much risk in credit quality. For a small amount, such difference is negligible. You can use online FD Interest rate Calculator to know the exact amount of interest for the principal amount and interest rate.

Does the ICRA rating guarantee the protection?

No investment in the world is without an element of the risk. It is only the degree of risk that varies. The risk can be higher or lower, but it persists. Since the purpose of investment in the Fixed deposit is to protect capital and ensure a steady return, it is necessary to take the informed decision. ICRA rating helps you to do this precisely. You can filter out the investment options that appears risky and park your money into relatively safe investment. Hence, apart from the ICRA rating, you can check the track record of repayment by the financial institutions in the past. The funds having MAAA rating with 10+ years of clean repayment history is much better than MAAA rated fund with only two years of record.

Also, Read This: What is CRISIL?