




































Indian Journal of Finance and Banking 

 Vol. 7, No. 1; 2021 

                                       ISSN 2574-6081   E-ISSN 2574-609X 

Published by CRIBFB, USA 

 

31 

AN EMPIRICAL STUDY ON IMPACT OF CREDIT RATING ON 

CREDIT RISK OF BANKS: A LITERATURE REVIEW 
 

 
Sunitha. G 

PhD Research Scholar 

Department of Business Management 

KLEF (Deemed to be University), India 

E-mail: sunitha27.g@gmail.com 

 

Dr. V. Venu Madhav 

Associate Professor 

Department of Business Management 

KLEF (Deemed to be University), India 

E-mail: dr.v.v.madhav@gmail.com 

 

 

ABSTRACT 

In the financial markets, for investors, lenders, and issuers, credit rating agencies (CRAs) have a 

critical part in reducing the asymmetry of information between various parties. Credit ratings allow us 

to recognize the credit impending of a region's individuals. The paper clearly describes the role played 

in the establishment of a nation by credit rating agencies; there is a rise in new start-ups as all 

investors are rated favorably. Banks are helping to recognize the investment position of India. The 

main aim of the study is to analyze the research gap on the impact of credit rating on credit risk with a 

review of the literature. The study briefly explains the research gap which helps to analyze the factors 

which are responsible for credit risk. The study analyzes the definitions of basic terms, the origin of 

credit rating agencies’ objectives, and the scope of the present study and the literature review by 

assessing the credit rating users and examined the consequence of credit rating agencies on the Indian 

financial markets. Based on the nationwide and worldwide literature it is found that if the credit 

history of the investors is good then their credit score would be better and positive. It would also be 

incredibly convenient to collect loans. Finally, it is concluded that there is a positive impact of Credit 

Rating on Credit Risk of banking sectors in India. 

 

Keywords: Credit Rating, Credit Rating Agencies, Banks, Services, Credit Risk. 

 

JEL Classification Codes: A31, G21, G33, N2, D53. 

 

INTRODUCTION 

The service sector is an essential industry that contributes significantly to the growth of the country, 

Credit ratings fall below those of financial services because their scores have financial security. 

Significant participants are the credit rating companies in the financial sector. To compose a 

knowledgeable conclusion on the capital markets, they have an objective assessment of the credit 

capability of debt issuers. The CRA’s, the 'gatekeepers' of the financial and capital market, have over 

time become a position of immense power and influence.  

According to United States Congress, the appraisal affects the ability of an organization to 

borrow money. This decides whether a mutual fund or a money market fund is capable of investing in 

a company's bonds and has an effect on the price of the stock. For decades, the three main credit rating 



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agencies - Moody's, Standard & Poor's (S&P), and Fitch Ratings - have dominated the credit rating 

industry all over the world in the nonappearance of a countrywide and worldwide regulatory system. 

Credit scores are arguably one of the most severe financial issues as a consequence of the recent 

economic downturn. In the last few years, the position and significance of credit rating agencies have 

been increasing. Concerning credit risk, credit ratings are judgments. Standard & Poor's ratings reflect 

the view of the institution of the ability and ability of an issuer to fulfil its financial obligations in full 

and on time, like a state or regional company or government. It is also possible to relate credit ratings 

to the credit value of an entity debt issue, like a business or public bond, as well as to the relative 

probability of a default issue. Credit rating agencies’ responsibility specialized in the evaluation of 

credit risk to issue credit ratings. To measure creditworthiness, each and every agency applies its 

methodology and utilizes a particular ranking scale to issue opinions on ratings. To express the 

organization's judgment on the relative extent of credit risk, ratings are usually conveyed as 

correspondence results ranging from 'AAA' to 'D'. 

 

Definition Credit Rating 

Credit rating refers to recognizing the ability of consumers to judge credit, which means respecting the 

customer's credit repayment history. Both customers who want to browse for credit facilities use credit 

scores. 

 

Credit Rating Agencies 

Besides, there are regional, specialized credit rating agencies that are focusing on a geographic area or 

industry, in addition to overall credit rating agencies like Standard & Poor's Ratings Services. To 

measure creditworthiness, each and every agency uses its methodology and makes a particular ranking 

scale to publish its opinions on ratings. To express the organization's opinion on the relative degree of 

credit risk, ratings are expressed in the form of letter grades which range from 'AAA' to 'D'. 

 

The Genesis of Credit Rating Agencies 

The Credit Rating Agency's journey started with Lewis Tappan in New York City in 1841. Then, 

Robert Dun, who published his first guide to scores in 1859, received it. John Bradstreet, an additional 

agency, began in 1849 and has published a guide on ratings in 1857. Credit rating agencies were born 

in the early 1900s when ratings, especially those relating to the railway bond market, started to be 

realistic for securities. The creation of wide-ranging railway networks in the United States contributed 

to the growth of business bond-related problems to fund them and, consequently, to a bond market that 

was several times larger than that of other nations. The demand for autonomous market expertise, 

especially for independent bond lending analysis, began to increase following the 1907 financial crisis. 

In 1909, a journal focused exclusively on railroad bonds was written by the financial analyst John 

Moody. His evaluations were the first to be widely distributed in an easy-to-get format, and his 

business was also the first to charge subscription charges to investors. 

 

NEED AND IMPORTANCE OF CREDIT RATING AGENCIES 

Credit rating agencies have a considerable part in the economy's overall growth. Credit rating agencies 

have the primary duty to reduce the asymmetry in credit market awareness by their skill evaluation. It 

also helps debt distributors to value their problems acceptably and to reach pioneering investors. This 

encourages investors to start new businesses, which in turn boosts the country's revenues. The primary 

aspire of the research is to understand the responsibility of a nation's credit rating agencies on the 

financial market. 

 

WHY CREDIT RATINGS ARE USED?  

Credit ratings have a beneficial role in serving businesses and governments raise funds on the capital 

markets. Sometimes, they borrow money directly from investors by selling bonds, instead of taking 

loans from a bank. These debt instruments like public bonds are purchased by investors planning to 



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obtain interest along with their principal at the maturity of the bond, or in the form of monthly 

payments. Credit ratings can facilitate the practice of issuing and purchasing and erstwhile debt 

problems through a reliable, generally renowned, and long-lasting estimation of credit risk. Investors 

and other market contributors can make use of the ratings to test for their threat acceptance or credit 

risk requirements for investment and business decisions in line with their relevant credit risk issues. 

The investor, for example, should check to decide if its credit rating is in line with the degree of the 

credit risk it would take concerning the purchase of a municipal bond. At the same time, organizations 

may use credit ratings to fuel growth and/or fund research and development, along with public 

initiatives in governments, cities, and other classes. 

 

OBJECTIVES OF THE STUDY 

 To study the overview of credit rating agencies in India. 

 To know how Credit Ratings help in a country’s development. 

 To assess the users of the credit rating. 

 To observe the impact of credit rating agencies on Indian financial markets. 

 

SCOPE OF THE STUDY 

The theoretical dimensions of credit ratings in the developing world are demonstrated by their scale. 

The study was performed on diverse aspects of the efficiency of credit rating agencies. The analysis 

considered the national and international journals for studying credit rating and credit risk of the 

Indian banking sector, such as public and private sector banks. Secondary data was utilized for the 

study in the form of a literature review. 

 

REVIEW OF LITERATURE 

Studies in the past have compared various parameters related to bank performance including credit risk 

measurement and management between Private as well as Public Sector Banks. A review of the 

literature on this topic shows that there is no agreement on the ownership of banks and their 

performance. Some studies have revealed that bank performance improved when state-owned banks 

were either fully privatized or partially privatized. Other reports suggest that public sector banks 

performed better than private sector banks. 

In this paper, Partnoy (2017) addresses three problems faced by credit rating agencies due to 

the government of Congress. In this the author presented solutions for certain problems. The author 

strongly placed pressure on all sides, i.e. credit rating agencies and investors, to fix the ongoing issue. 

Owing to the methodologies practiced by the rating agencies, the credit rating pattern is missing. The 

problem of unfair and mechanistic dependency on credit scores was also highlighted by him. He found 

there were no standards for credit rating agencies and introduced some legislative changes to address 

this issue. He addressed the methods of action and different types of threats. But the patterns in credit 

rating are missing in this paper. 

A rivalry between credit rating agencies is addressed with authors Bolton et al. (2012) via a 

model to decrease the efficiency of the industry. Briefly, they clarified the features of rating agencies. 

The study was structured by explaining the author's comparison and extension of credit rating 

agencies. They have also made some assumptions that indicate an investment perception. The analysis 

was clarified by assessing the game with the rating agencies' monopoly. They explained the rivalry and 

its empirical implications among credit rating agencies. As a future enhancement few more 

assumptions can be made. 

Approaching the fundamental concepts in the flow of investment information by credit rating 

agencies and analyzing the critical position of the credit rating agency, Lynch (2009). The author has 

assessed the function of credit rating agencies on the capital market and speculation policy. He 

clarified how private contractors submit credit rating details. He added to the divisive problems faced 

by credit rating agencies. He complained about the credit rating agencies' credibility protections. The 



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report analyses many of the issues concerning the established regulatory system. The problems of the 

issuer-paid interest dispute were also highlighted. 

The authors examined numerous articles and evaluated the theory using statistical techniques 

such as regression analysis. As per that report, presently no pragmatic proof that the report is based on 

a bivariate or multivariant analysis that supports the association among the capital strength and the 

Jordanian company's credit rating. The number of fixed assets was defined as fairly small. The authors 

concluded that the study supports different approaches used to test the internal model of credit rating, 

suggesting that certain variables influence credit ratings significantly. The results of the study show 

that positively high credit scores are also linked to size and growth potential. The study is addressed by 

the author and considers the degree to which bank ratings represent banks and the features of 

accounting data to estimate the issue. Using descriptive analysis by taking samples from the US and 

the United Kingdom, the author clarified the study by Hassan and Barrell (2013). To validate the 

study, statistical methods like correlation matrix and the consequences of regression are used. The 

findings revealed the success of the model, which required proper credit ratings to be assigned by 74 

percent to 78 percent of banks. Banks were rated as top-rated banks and the lower-rated banks based 

on their scores. 

Elkhoury (2009) the author addressed the knowledge break through the use of qualitative and 

quantitative approaches in the global monetary system as assessment processes and methods. The 

author has established the Normal and Weak methodological profile. Both the developed and 

developing markets are explained by the credit rating determinants. The author discussed the other two 

different topics separately. The rates of international interest and the export structure are being 

increased. He talked about the shortcomings arising from the regulatory initiative. Credit rating 

agencies evaluate several variables that have been explained in the study for the allocation of ratings. 

The author's view on the credit rating agencies is expressed in the study. This analysis advanced my 

research to appreciate the methodologies employed by credit rating agencies and helped me further 

explore the topics discussed in the review. 

In a study conducted by Sinkey and Greenwalt (1991) In the United States of America it was 

found that on the experience of credit loss and risk-taking actions of commercial banks credit risk 

emerges primarily from weak credit policies and poor macroeconomic conditions. Caprio and 

Klingebiel (2000) recorded that, due to poor management and politically influenced loan 

disbursements, many state-owned banks demonstrated poor financial results. Bratanovic and Greuning 

(2000) proposed that credit risk ratios could be used as a measure of the credit risk connected with the 

banking sector, demonstrating the importance of such ratios for banks to reduce the ratio within and 

prevent any terrible failures.  

In this paper, Bhattacharyya (2009) evaluated and highlighted that the PBIT & Debt plus 

networth ratio, current ratio, and growth in the net sales acts as an imperative part out of the 10 

variables used by ICRA for issuer ranking, but at any point of time the dependent elements can also 

change ratings. 

Bheemanagauda (2008) have attempted to estimate the presence of CRA’s in India, counting 

CRISIL, ICRA, CARE, and FITCH, both in the country and out of the country, other than the notice of 

current writings shows that in spite of the escalating significance of CRA’s as data agencies, credit 

rating agencies are becoming increasingly important as knowledge providers for credit-related 

opinions The majority of researches managed in India to date have largely focused on the theoretical 

and conceptual credit rating system of India. 

The two leading Indian CRA’s have attempted to test the business supremacy rating 

methodology used by Achalapathi and Rajani (2004), namely ICRA and CRISIL. The researchers 

attempted to relate the principles of accountability, revelation and ranking technologies to explore the 

business authority information of different entities and attempted to figure out regardless or not a good 

number of firms complied with regulatory requirements. Compared to financially weak companies, it 

was noticed that much was disclosed by financially better-performing companies. Similarly, 

businesses with restricted proportion of investors in Foreign Institutions in the shareowner model 



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reported further with reference to their corporate governance when differentiated to organizations with 

a lower share of FII’s. While business reports were constantly at a cost borne by the investors, they 

were expected to be disclosed by the shareholders. Many corporations act in accordance with the 

regulatory criteria as commercial divulgence strengthens the corporate integrity of the corporation. 

Poon and Firth (2005) discussed the lack of dissemination of the requested or unrequested 

results in their research paper. Consequently, Fitch's bank ratings were analyzed for this point in 82 

countries. Authors also analyzed if the financial details of the 52 banks with the requested ratings were 

different from those with the unrequested ratings. The authors established that, since only public data 

was the basis of unrequested assessments, the ratings requested were typically higher than the ratings 

requested. In comparison, companies with unwanted ratings have lower financial profiles than those 

with the submission of ratings. This could also explain why some banks can apply for scores, 

according to analysts, but others can't. 

Tang (2009) has examined the effect of refined rating information on credit market admission 

to businesses, monetary decisions, and speculation policy by using Moody's 1982 loan evaluation 

design improvement. The writer pointed out that the companies that were strengthened as an effect of 

the more sophisticated gradation saw a large decline in their borrowing rate in contrast with companies 

with decreased scores. Furthermore, businesses with a rating refining upgrade have issuance, which 

confirms that improved access to the capital market allows upgraded firms to replace the funding of 

equity debt. This has shown that higher corporate rate refinements are linked to higher capital 

spending, lower cash gathering, and growth in the assets than lesser ratings. The paper, therefore, 

explained the part played by credit ratings in deciding the company's capital configuration in 

conditions of both lending costs and the debt amount. 

Reddy and Gowda (2008) explained in their article the relevance and troubles of the credit 

rating system existing in the country. Also gave priority were the foundations of credit rating and 

credit rating practices in India. The views of the Hyderabad investors sample were then adopted. The 

study's findings showed that most participants are aware of the existence of diverse credit rating 

agencies, like CRISIL, CARE, ICRA, etc. Roughly 40% (80 of 200) of the people who answered rely 

on the credit rating for investing in debt instruments, but 50% (94 of 180), more than most credit rating 

agencies depend on CRISIL to make their investment. The study accomplished that, while numerous 

investors are confused with more than one credit rating agency, most of them are happy with credit 

rating agency supervision. 

Kumar and Rao (2012) in their report red Credit Rating – current monetary structure, indicated 

credit rating for the security of small investors who are the key targets for unlisted corporate debt in 

the form of fixed deposits with enterprises. Classification is generally used as alphanumeric symbols 

and is based on the rating agency's judgment. 

Matthies (2013) proposed some ideas for credit rating in his paper. He reports on the current 

state of analytical examination in the area of corporate ratings and its connection with the ratings of 

several other organizations and different previous important data. The results from three research lines, 

such as the connection stuck between credit ratings and corporate defaults, the influence of loan 

ratings on financial markets, credit rating variables, and credit rating adjustments, are considered in 

particular. The results from each line are relevant and essential for the construction and analysis of 

studies in the remaining two areas. Besides, the design and development of credit ratings and the rating 

scale are important for explaining all empirical findings. 

A paper titled by Saluja and Drolia (2015) published the effect of loan rating on cash and 

earnings performance of Indian companies. In the special article, the authors reiterated that the load 

rating is a probabilistic estimate of the default in debt instrument payment. The firms that have good 

growth hold more cash. In addition, businesses with substantial profits and sales retain 10% to 20% of 

the total assets in cash. The author also described the term earnings momentum. They accept that 

borrower private data also plays a most important part in decision-making on the structure of maturity 

of corporate debt. The study is, however, intended to measure the effect of the loan rating on the cash 

assets of a business and to calculate the collision of the credit rating on the income momentum of a 



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company. A random sample of 30 Indian companies included in the BSE 200 index has been 

attempted. For these firms, their respective annual reports and BSE have provided the quarterly data 

from 2006 to 2014. CRISIL collected credit rating information. The 36 effects of the credit rating on 

cash holdings and income momentum were assessed using the classical linear regression model. Credit 

scores have a direct effect on the decisions taken by managers about the capital structure. The results 

can be used for enhancement and downgrading, as well as for small and large companies. 

 

CONCLUSION 

It is found that the credit background of investors is good after reviewing the above national and 

international literature, so their credit score will be stronger and optimistic. It would also be incredibly 

convenient to collect loans. Investors may spend in diverse companies that increase jobs when loans 

are allowed. When companies get positive ratings, loans are issues, companies can start and expand 

their business and provide employment opportunities to many people. This results in an increase of the 

country’s national along with the GDP. A country's expansion depends on the country's GDP. As per 

the report, the GDP shows a positive increase which shows the growth of the country. If all the 

industries are improving, then the country's growth is very easy. Finally, it is concluded that the credit 

ranking has a constructive effect on the credit risk of the banking sector in India. Further study can be 

done on analyzing the public, private, commercial, and cooperative banks. 

 

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Copyrights 

Copyright for this article is retained by the author(s), with first publication rights granted to the 

journal. This is an open-access article distributed under the terms and conditions of the Creative 

Commons Attribution license (http://creativecommons.org/licenses/by/4.0) 

 

https://scholarlycommons.law.case.edu/caselrev/vol59/iss2/3
http://hdl.handle.net/10419/79580
https://digitalcommons.law.uw.edu/wlr/vol92/iss3/6
https://doi.org/10.1111/j.0306-686X.2005.00646.x
https://doi.org/10.1007/BF00127083
https://doi.org/10.1016/j.jfineco.2008.07.007

