Impact of credit rating on Indian banking sector

Credit rating is a tool to evaluate the credit worthiness of a company (issuer) or Government who issues debt. There are credit rating agencies throughout the World who evaluates the credit worthiness of an issuer of debt and identifies the defaulters. Credit rating agencies consider numerous factors to rate the companies. The impact of ratings by credit rating agencies is huge on the issuers. This rating by agencies will be used by individuals or companies who purchase the bond or debenture from the issuer. Based on the ratings the risk level of the bond or debenture can be obtained. A poor credit rating shows that there is a risk of default by the company or Government (issuers of debt). Recently some of the major credit rating agencies in the World have downgraded the Indian companies which impacted them a lot. This study focus on the functions of credit rating agencies in the world, their rating on Indian banks and the impact of these ratings on the Indian banks market value.

In this study some of the major public sector and private sector banks like State bank of India, ICICI, Axis bank, Bank of Baroda, HDFC bank and Punjab National Bank have been considered for the study. The impact of rating on these banks has been analyzed. Overall it can be concluded that the bank stocks were vulnerable due to change in credit ratings. The main reason for this is due to investor sentiments as well as media participation in educating the investors about credit rating.