Question

Explain the functions of Credit Rating Agencies.

Answer 1

The main functions of credit rating agencies are as follows:

1. They provide expert evaluations and offer an independent opinion. By assessing the risks and returns, they assist investors in making informed investment decisions.
2. They collect, analyse, and simplify complex financial data, presenting it in a form that is easy for investors to understand.
3. They do not charge any fees from investors for providing credit ratings.
4. They continuously monitor rated securities, which helps enforce financial discipline among borrowers.
5. Investors save both time and money, as they do not need to conduct their own assessment of a borrower’s creditworthiness.
6. Credit ratings help enhance the public reputation of borrowers, making it easier for them to raise funds and often lower borrowing costs.