1. What does credit rating primarily measure?
- A. Profitability of a company
- B. Market share of a company
- C. Ability of a borrower to repay debt obligations
- D. Growth prospects of an industry
Credit rating is an opinion on the creditworthiness of a borrower or instrument, i.e., the ability and willingness to repay debt on time.
2. Which was the first Credit Rating Agency established in India?
- A. CRISIL
- B. ICRA
- C. CARE
- D. Fitch India
CRISIL (Credit Rating Information Services of India Limited) was the first Indian CRA, set up in 1987.
3. Credit rating is:
- A. A guarantee of repayment
- B. A recommendation to buy or sell securities
- C. A measure of profitability
- D. An opinion on the relative degree of risk associated with timely repayment
Credit rating is not a guarantee, but an independent opinion expressing the risk of timely repayment of debt obligations.
4. Which of the following is NOT a characteristic of credit rating?
- A. Opinion-based
- B. Static and permanent
- C. Symbol-based representation
- D. Issued by specialized agencies
Credit ratings are dynamic and may change over time with the borrower's financial performance, hence not permanent.
5. Which of the following is an importance of credit rating for investors?
- A. Higher interest income always guaranteed
- B. Free insurance coverage on investments
- C. Helps in assessing risk before investing
- D. Ensures tax benefits
Credit rating provides investors with an independent assessment of the credit risk, helping them make informed decisions.
6. Which of the following is an importance of credit rating for issuers (companies)?
- A. Better market access and lower cost of raising funds
- B. Guaranteed profits
- C. Freedom from RBI regulation
- D. No need for disclosures
A higher credit rating enables issuers to access markets more easily and borrow at lower interest costs.
7. Which of the following is a key benefit of credit rating to the financial system as a whole?
- A. Guarantees repayment of all loans
- B. Promotes transparency and investor confidence
- C. Eliminates market risks
- D. Provides tax concessions
Credit rating improves transparency and boosts confidence by giving investors a reliable opinion on risk levels, enhancing market efficiency.
8. Which factor is NOT typically considered by credit rating agencies while rating a company?
- A. Financial performance
- B. Management quality
- C. Industry risk
- D. Personal hobbies of directors
Credit rating agencies assess financials, management, industry and business risks. Personal hobbies of directors are irrelevant for creditworthiness.
9. What is the first step in the credit rating process?
- A. Surveillance of assigned rating
- B. Communication of rating to issuer
- C. Request for rating by the issuer
- D. Monitoring market feedback
The process begins when the company or issuer requests a credit rating from the rating agency.
10. After the credit rating is assigned, what step follows?
- A. Ongoing surveillance and review of rating
- B. Filing case with SEBI
- C. Closing of company accounts
- D. Issuer guarantees repayment
Once assigned, credit ratings are continuously monitored to reflect any change in financial or business conditions.
11. What does a rating symbol of ‘AAA’ typically signify?
- A. High credit risk
- B. Moderate safety
- C. Speculative grade
- D. Highest degree of safety and lowest credit risk
‘AAA’ indicates the highest safety level and extremely low risk of default, often the best rating assigned by CRAs.
12. Which rating symbol generally represents instruments that are highly speculative and prone to default?
A ‘C’ rating usually reflects instruments that are highly vulnerable to default and carry very high credit risk.
13. In credit rating, what does the term ‘Rating Outlook’ indicate?
- A. The likely direction of rating movement in the medium term
- B. The interest rate fixed on the instrument
- C. The tax benefits available on the security
- D. The profitability forecast of the company
Rating outlook reflects the expected direction (positive, negative, or stable) in which a credit rating is likely to move over the medium term.
14. If a company’s credit rating is ‘AA’ with a ‘Negative Outlook’, what does it imply?
- A. The company is assured of an upgrade soon
- B. The company’s repayment ability will never change
- C. The rating may be downgraded if adverse trends continue
- D. The rating has no significance
A negative outlook means the current rating could be downgraded in the future if the company’s financial or business risks worsen.
15. Which regulator governs Credit Rating Agencies (CRAs) in India?
- A. Reserve Bank of India (RBI)
- B. Securities and Exchange Board of India (SEBI)
- C. Ministry of Finance
- D. Indian Banks’ Association (IBA)
In India, Credit Rating Agencies are regulated by SEBI under SEBI (Credit Rating Agencies) Regulations, 1999.
16. Under SEBI regulations, which of the following is mandatory for CRAs?
- A. Guarantee repayment of debt instruments
- B. Publish annual profits of issuers
- C. Provide tax benefits to rated companies
- D. Disclose rating methodology and ensure regular surveillance
SEBI requires CRAs to clearly disclose their rating methodology and to review ratings on a continuous basis.
17. Who pays the fees for obtaining a credit rating?
- A. The issuer of the instrument
- B. The investors collectively
- C. The government of India
- D. SEBI as regulator
In the issuer-pays model used in India, the company issuing the debt instrument pays the fees for its credit rating.
18. What is one criticism of the ‘issuer-pays’ model of credit rating?
- A. Investors may have to bear higher transaction costs
- B. Ratings become too frequent
- C. Potential conflict of interest as CRAs are paid by issuers
- D. CRAs cannot cover multiple industries
Since issuers pay for their own ratings, there is a risk of bias or conflict of interest in the rating process.
19. What is Credit Scoring?
- A. A tax rebate system for borrowers
- B. A tool to calculate company profits
- C. A method of calculating GDP growth
- D. A statistical method used to evaluate the creditworthiness of an individual or entity
Credit scoring is a statistical model that predicts the likelihood of a borrower repaying debt based on their credit history and other factors.
20. Which of the following is NOT a Credit Information Company (CIC) in India?
- A. CIBIL
- B. Equifax
- C. IRDAI
- D. Experian
India has four licensed CICs: CIBIL, Equifax, Experian, and CRIF Highmark. IRDAI is a regulator for insurance, not a CIC.
21. How many CICs are licensed by RBI to operate in India?
- A. Four
- B. Two
- C. Five
- D. Six
As per RBI, four CICs are licensed in India: TransUnion CIBIL, Equifax, Experian, and CRIF Highmark.
22. Who can become a member of a Credit Information Company (CIC) in India?
- A. Only NBFCs with more than ₹1000 crore capital
- B. Banks, NBFCs, financial institutions, credit card companies
- C. Only individual borrowers
- D. Only foreign banks
Membership of CICs is open to banks, NBFCs, housing finance companies, and other financial institutions that provide credit.
23. What is the benefit of being a member of a CIC?
- A. Guaranteed profits for the member
- B. Exemption from RBI regulations
- C. Access to borrower credit information and repayment history
- D. Priority lending rights from the government
CIC members can access detailed credit information of borrowers, which helps in informed lending and risk management.
24. Who regulates the functioning of Credit Information Companies (CICs) in India?
- A. Reserve Bank of India (RBI)
- B. SEBI
- C. Ministry of Finance
- D. NABARD
Credit Information Companies are governed by the CIC (Regulation) Act, 2005 and regulated by the RBI.
25. Under which Act are CICs in India regulated?
- A. Companies Act, 2013
- B. SEBI Act, 1992
- C. Banking Regulation Act, 1949
- D. Credit Information Companies (Regulation) Act, 2005
CICs in India are regulated under the CIC (Regulation) Act, 2005, which defines their establishment, licensing, and functioning.
26. What is the typical range of a credit score in India?
- A. 100–1000
- B. 300–900
- C. 0–500
- D. 200–800
In India, credit scores usually range from 300 to 900. A score above 750 is generally considered good for loan approval.
27. Which of the following best describes the difference between Credit Rating and Credit Score?
- A. Both are identical measures of borrower risk
- B. Credit Rating applies to individuals, Credit Score applies to companies
- C. Credit Rating applies to companies/instruments, Credit Score applies to individuals
- D. Both are determined by SEBI
Credit Rating is used for companies, financial instruments, or debt securities, while Credit Score is used for individuals.
28. A credit score of 580 generally indicates:
- A. High risk borrower
- B. Excellent creditworthiness
- C. Moderate risk borrower
- D. Borrower has no credit history
A score of 580 is considered poor and indicates a high-risk borrower, making it difficult to get loans at favorable terms.
