Why Banks Look Beyond Credit Ratings

Even where a strong external rating is available, banks continue to conduct their own full independent credit appraisal because ratings are updated on a periodic and event-driven cycle rather than continuously, are facility-agnostic rather than tailored to a specific proposed transaction, and do not capture the granular, transaction-level account conduct data a bank accumulates through an ongoing direct relationship.

The Timeliness Gap Between Rating Updates and Real-Time Developments

A credit rating, however professionally produced, is necessarily a point-in-time assessment, refreshed on a periodic — typically annual — and event-driven basis, discussed extensively in the dedicated surveillance pillar of this content series. Between scheduled reviews, a company's financial position can shift meaningfully, and while material developments are generally expected to trigger an interim review, there is inevitably some lag between an actual business development and its full reflection in a published rating action. Banks, by contrast, particularly those with an active operating relationship through current accounts and working capital facilities, often have more continuous, real-time visibility into a company's cash flow patterns and account conduct, which can surface emerging concerns — or emerging strength — somewhat ahead of the next scheduled rating review.

Ratings Are Facility-Agnostic; Bank Appraisal Is Facility-Specific

As discussed at length in the companion article on credit rating versus bank credit appraisal elsewhere in this pillar, an external rating is generally designed to reflect a company's overall creditworthiness across its rated instruments as a whole, rather than being tailored to the specific facility, security package, tenure, and structure a particular bank might be considering. Banks necessarily go beyond the rating to evaluate these facility-specific dimensions directly, since no external rating, by its general nature, can fully substitute for this transaction-specific analysis.

The Issuer-Paid Rating Model and Why Banks Maintain Independent Judgement

Most credit ratings in India, as in most global markets, operate under an issuer-paid model, where the company being rated pays the rating agency's fee, a structure that exists because it allows rating agencies to make their published ratings freely available to the broader market of investors and lenders rather than charging each individual user, but which has also been the subject of long-running discussion within the credit markets globally about the potential for inherent conflicts of interest this structure can create. SEBI's regulatory framework for credit rating agencies includes specific provisions aimed at managing and disclosing these potential conflicts, and reputable agencies maintain internal safeguards including separation between their commercial and analytical functions.

Nonetheless, this structural feature of the industry is one of several reasons banks are generally unwilling to rely on an external rating as their sole basis for a lending decision, preferring to maintain and apply their own fully independent credit judgement — sourced from data and analysis the bank itself controls and is directly accountable for — alongside, rather than instead of, the external rating.

Conduct-Based Data Ratings Do Not Fully Capture

A bank operating a company's current account, cash credit facility, or other transactional relationship accumulates a granular, ongoing stream of conduct-based data — payment timeliness, frequency and duration of any overdrawing, patterns in fund utilisation, cheque or payment returns, and similar — that provides a distinctly different and, in some respects, more immediately actionable view of the borrower's financial discipline than a periodic external rating captures. This data, along with credit bureau information on the company's broader borrowing and repayment history across all its lenders, forms an important, bank-specific input that sits alongside, rather than within, the external rating.

Why Banks Build and Maintain Their Own Internal Rating Models

For these combined reasons, virtually all Indian banks maintain their own internal credit rating or scoring models, discussed in detail in the companion article on external versus internal bank ratings elsewhere in this pillar, calibrated to the bank's own historical loss experience, risk appetite, and portfolio composition, used alongside external ratings rather than as a simple substitute for them. This dual-track approach — external rating as one structured, independent input, internal rating as the bank's own comprehensive, facility-specific and relationship-specific judgement — is now standard practice across the Indian banking system and reflects a deliberate, considered approach to credit risk management rather than any specific distrust of external ratings as such.

Illustrative Example

Consider a hypothetical trading company carrying a solid A-category external rating, whose relationship bank nonetheless notices, through its own ongoing account monitoring, a pattern of increasingly frequent temporary overdrawing on its cash credit account over several consecutive months — a development not yet reflected in the company's external rating, which was last reviewed some months earlier and remains unchanged. The bank's credit team proactively reaches out to understand the underlying cause, which turns out to be a temporary, well-explained working capital timing mismatch tied to a large customer's payment delay rather than a fundamental deterioration in the company's credit profile — but the episode illustrates precisely why the bank's own continuous account monitoring, operating independently of and ahead of the external rating's own review cycle, provided genuinely useful, timely information the rating alone had not yet captured.

Frequently Asked Questions

Does the issuer-paid rating model mean ratings cannot be trusted?

No, it means banks and other sophisticated users of ratings generally apply their own independent judgement alongside the rating rather than relying on it exclusively, which is standard, prudent practice rather than a specific indictment of the rating's reliability.

How quickly does a bank typically notice an emerging problem compared to a rating agency?

This varies considerably by situation, but a bank with an active operating account relationship often has more immediate, transaction-level visibility into emerging cash flow stress than a rating agency conducting periodic or event-triggered reviews, simply due to the difference in how continuously each party observes the company's activity.

Can a company request that its bank rely more heavily on the external rating and less on its own internal appraisal?

This is not generally something a company can request or control, since a bank's internal risk management practices, including how it weighs different information sources, are determined by the bank's own policies and regulatory obligations rather than borrower preference.

Do banks ever disagree with a rating agency's assessment?

Yes, this can and does happen, reflecting the banks' own independent analysis and access to additional, bank-specific information; such disagreement is a normal feature of a well-functioning credit system with multiple, independent sources of credit assessment rather than a sign of dysfunction in either the bank's or the agency's process.

Talk to FinMen Advisors — for help preparing for a rating exercise, write to marketing@finmen.in or call +91 77387 14680.

Disclaimer: This article is intended for general informational and educational purposes only and does not constitute financial, credit, investment, or legal advice. Credit ratings are assigned solely by SEBI-registered Credit Rating Agencies (such as CRISIL, ICRA, CARE Ratings, India Ratings, Brickwork, Acuite, and Infomerics) based on their own methodologies, policies, and the information available to them at the time of assessment. FinMen Advisors provides preparatory and advisory support to companies undergoing a rating exercise and does not issue, influence, or guarantee any rating outcome. Readers should exercise independent judgement and consult qualified professionals before making business or financial decisions.