Decoding asset quality or credit rating

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With more and more investors being introduced to tech-savvy means of information, it has become important for an individual or company to generate a high value of goodwill. This goodwill not only helps an organization to get more business but also helps it in availing better investment opportunities. Terms like asset quality and credit rating have gained much importance recently.

What is Asset Quality?

Asset Quality is an evaluation of a particular asset, stating the amount of credit risk associated with it. Assets of a company/individual determine their condition and ability to repay their loans in future and conduct smooth functioning of their operations.

One’s investments is the most fluctuating and vulnerable asset class which determines one’s creditworthiness in the long term. Also once lent, loans become assets as the interest is expected to flow to the firm. The creation of loan assets exposes organizations to a risk of default of their investment. Asset quality refers to the manner in which the borrower meets his/her contractual obligations in the given time. Asset quality rating is critical in bringing a high credit rating to an organization, as it shows the management's capability to control and monitor credit risks associated with these assets.

Low asset quality rating means that the investments have a low rate of return and higher chances of default as compared to the high rating assets. Similarly, high asset quality assets boast of a high return as well as low chance of default. A rating of 1 means that the asset is a low risk asset meaning good in quality. As you go towards 5, the risk associated with the asset increases thus depicting increasing asset quality problems.

Factors determining asset quality

Level of Diversification: Assets should be well classified in order to reduce the default risk as well as incurring a steady rate of return. Better the diversification, higher is the asset quality. Similarly, investing in similar assets can lead to the returns going in the same direction, making it more vulnerable to the fluctuating market conditions. Asset clutters will always reflect low asset quality rating.

Rules/Regulations: Different regulations or rules put into place to limit credit risks associated with an asset also depicts its quality rating. For example, a longer credit period depicts low ratings while a shorter credit period will yield a higher asset quality rating.

Efficiency of Operations: Efficiency of assets operations largely determines their creditworthiness and quality. A non-performing asset is a credit facility where the interest and the principal amount have remained due in past times. More efficient the asset, higher is the asset quality rating and vice versa.

A well experienced wealth manager will definitely work towards utilizing these factors to the fullest in order to maximize the asset quality base of an organization.

What is Credit Rating?

Credit Rating is an evaluation of the creditworthiness of a borrower to fulfill his/her financial commitments or repayment of debts and other financial obligations. The borrower can be an individual, company, state authority or the government itself. Individual borrowers have credit scores while a company or government organization gets a credit rating. These ratings are given based on the credit assessment done by various credit rating agencies. The agencies are in turn paid a fee for their services by the borrower who intends to seek a credit rating for their company or debt issues.

A good credit rating depicts that the borrower will pay back their financial obligation within the given time frame with very less chances of default. While a low credit rating is a risk to the lender's capital where the chances of default are high. Credit rating is not forever static. Credit rating of an organization may change in accordance with new events or change in operations over time. An organization which flaunts a long term good credit rating will always be preferred over an organization with a higher credit rating for a short term. High credit rating positively affects the ease with which a loan can be procured. It also determines the rate of interest charged on a particular loan.

How does Asset Quality affect Credit Rating?

Asset quality rating helps in determining credit rating of an organization. A good asset quality rating leads to a higher credit rating, which in turn strengthens an organization's position in the market.

Both asset quality and credit rating move in a virtuous circle where a better asset quality rating leads to higher credit rating. Due to high credit rating, an organization is able to procure loans at low rate of interest as well as invest in high return yielding bonds. These loans and bonds make up a better asset quality base which in turn again increases the credit rating of the organization.

A wealth manager works on allocating an organization's asset base in order to match the asset quality thus resulted to achieve the credit rating desired by the latter. All in all, asset quality and credit rating are important aspects of a wealth customer, and a wealth manager helps you manage it well. Hence, concentrate on utilizing your current assets to the fullest and leave the rest to the experts who have their best interest in your growth.

For all kinds of investment assistance that you may need, give us a call.

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Decoding asset quality or credit rating

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