What are External and Internal Credit Ratings?
External Credit Ratings:
External credit ratings improve market transparency by reducing knowledge gaps between issuers and potential investors. An external rating scale is used as an ordinal measure of risk.
Undertaken by approved External credit risk rating agencies such as S&P, Moody’s and Fitch.
Internal Credit Ratings:
Internal credit ratings are used by financial organisations to determine whether or not to give a loan and, if so, under what terms. Undertaken internally by the staff of the Bank independently by the Risk Management department.
Basel guidelines require that borrowers do internal credit risk rating for moving to an advanced approach.
Why are External and Internal Credit Ratings important?
A borrower’s credit rating can determine whether or not they are approved for a loan. People, corporations, and governments with good credit ratings can readily borrow money from financial institutions or the public debt markets. This can make it challenging to get a loan or a credit card.