What is the role of credit rating agencies in the financial system?

Credit rating agencies (CRAs) assess the creditworthiness of borrowers, including companies, financial institutions, and governments. They evaluate the ability of the borrower to repay debt on time and assign a rating, such as AAA, BBB, or C, based on financial health, past performance, and risk factors. These ratings help investors make informed decisions. For example, a higher rating indicates lower risk, making it easier for a company to borrow funds at better interest rates. A poor rating may lead to higher borrowing costs or difficulty in raising funds. CRAs play a crucial role in maintaining trust and transparency in the financial system. In India, well-known agencies include CRISIL, ICRA, and CARE. Their evaluations influence investment behavior and are especially important in bond markets and banking decisions.