What is Credit Rating ?

A credit rating represents the rating agency’s opinion on the likelihood of a rated debt obligation being repaid in full and on time. Usually alphanumeric symbols are used to convey a credit rating. Credit rating can be Internal Rating (Banks rate customers internally) or External Rating by external agencies like CRISIL, ICRA and others.

Relevance of Credit Rating in case of Buyers Credit Funding Bank

Buyers Credit Funding Banks ask for Internal and / or External Credit rating  in the Letter of Undertaking format (LOU).  Purpose for the same are

1. As per country regulations in which Indian bank branches operating, they have agreed and informed regulator that they would funds only those transaction which are above an X rating. Recently came accross a transaction where LOU was issued by local branch but overseas bank branch refused funding of the transaction post checking the rating of the client in LOU. Thus importer will now also have to keep this criteria in mind. For academic perspective, credit rating should not matter to buyers credit funding bank till the time they are receiving LOU from Indian bank as per their format. Reason being, buyers credit are funded on bank lines (taking risk on banks) and not on customer lines.
2.  Second purpose of taking rating details in LOU is to help classify the portfolio. In the region in which these branches are operating, there are regulatory compliances which these branches have to follow, based on which their loan policy and trade policy is formulated.
3. Rating are also required to determine provisioning on buyers credit transaction as per Basel II / Basel III norms.

Relevance of Credit Rating in case of Importers Bank & Importer 

From buyers credit perspective, some  importers bank provide preferential pricing to importer for LOU charges based on their rating

For Example: Bank of Baroda (BOB): Letter of Comfort Charges for availing Buyer’s Credit, varies based on rating. Please refer below chart:

* Source: www.bankofbaroda.com