Domestic Credit Rating –Operation and Effectiveness in … 2015-17. Being a permanent member of...
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CPD SEMINER PAPER
ON
Domestic Credit Rating – Operation and Effectiveness in Bangladesh
At
The Institute of Chartered Accountants of Bangladesh (ICAB)
By
N K A Mobin FCA, FCS, CFC Managing Director & CEO
Emerging Credit Rating Ltd.
On
April 30, 2015
Domestic Credit Rating – Operation and Effectiveness in Bangladesh | 2
N K A Mobin FCA, FCS, CFC
Mr. Mobin is one of the sponsor Directors of the Emerging Credit Rating Ltd. (ECRL). Currently he is
the Managing Director and Chief Executive Officer of the company. Professionally a Chartered
Accountant and the fellow member of the Institute of Chartered Accountants of Bangladesh
(ICAB) since 1992 and was an Articled student of KPMG-Rahman Rahman Huq, Chartered
Accountants during 1982-1986. He is also the fellow member of the Institute of Chartered
Secretaries of Bangladesh (ICSB) and a member of the Institute of Financial Consultants
(IFC) of USA. He did completed his BBA and MBA in Finance from University of Dhakaduring
1977-1982.
Mr. Mobin has vast experience in the field of Finance, Accounting, Taxation, System design,
implementation of computerized Accounting and Management (ERP) system, Financial Planning,
Budgeting, Internal Controls, Investment Decision, and Company Secretarial Practices. He has
specifically worked for arrangement of huge financing from local and international Banks and World
agencies couple of times. He had quite some international training and management courses namely
in Stockholm Business School in Sweden, National University of Singapore, INSEAD in France and
also AOTS/HIDA in Japan.
He has an illustrious 23 years professional career (13 years in top management and Board position)
in 4 multinational companies. Prior to joining ECRL, he worked at the biggest multinational
telecommunication Co. named Grameenphone Ltd. for 10+ years in various capacities as Director
Finance, Director Administration, Director Projects and Company Secretary. Before joining
Grameenphone in 1998, he worked in the Swiss pharmaceuticals Co. named Novartis Bangladesh
Limited(Ex Ciba–Geigy) for 3 years as Director Finance and Company Secretary,in multinational
fertilizer company named Karnaphuli Fertilizer Co. Ltd. (KAFCO) for 5 years as Manager
Finance & IT, and in Swedish Match/STORA named Dhaka Match Industries Co. Ltd. for 5 years
as Chief Accountant.
Mr. Mobin is the Vice President of Bangladesh Society for Total Quality Management (BSTQM) and
Advisor to the Executive Committee of Bangladesh Association of AOTS Alumni Society (BAAS) for
2015-17. Being a permanent member of Kurmitola Golf Club (KGC), he is a regular Golf Player and
managed to bag couple of trophies. He is married and having 3 sons.
mobile : +880 1711 500387, +880 1833 330002
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Table of Contents
Introduction: ........................................................................................................................................................ 5
What is Credit Rating? ........................................................................................................................................ 5
What Credit Rating is Not : ............................................................................................................................ 6
Substituting Ratings for Independent Analysis : ........................................................................................ 6
Who Can Perform Credit Rating : ................................................................................................................. 6
Who are the Regulators? ................................................................................................................................... 8
Bangladesh Securities and Exchange Commission (BSEC) : .................................................................... 8
Bangladesh Bank (BRPD) : ............................................................................................................................ 9
Insurance Development and Regulatory Authority (IDRA): ................................................................... 10
Types of Credit Rating Performed by DCRAs Operating in Bangladesh.................................................... 10
Corporate Debt .............................................................................................................................................. 11
Entity ............................................................................................................................................................... 11
Financial Institutions ..................................................................................................................................... 11
Insurance Rating ........................................................................................................................................... 11
Project Finance .............................................................................................................................................. 12
Small and Medium Enterprises (SME) ........................................................................................................ 12
Credit Rating Methodology .............................................................................................................................. 12
Credit Rating Evaluation Process .................................................................................................................... 13
Information Collection .................................................................................................................................. 13
Data Input, Analysis, Scoring & Review .................................................................................................... 14
Rating Score Sheet : ................................................................................................................................. 14
Score To Notch/Rating Symbol: .............................................................................................................. 15
Meaning of Rating Symbols: .................................................................................................................... 16
Rating Outlook:.......................................................................................................................................... 17
Rating Committee : ....................................................................................................................................... 17
Reporting : ..................................................................................................................................................... 17
Benefits of Credit Rating : ............................................................................................................................... 18
BASEL II and Credit Rating : ........................................................................................................................... 19
Basel II in Bangladesh : ................................................................................................................................... 19
PILLAR 1: ........................................................................................................................................................ 20
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PILLAR 2: ........................................................................................................................................................ 20
PILLAR 3: ........................................................................................................................................................ 21
Rating Category Mapping : .............................................................................................................................. 22
Capital Adequacy Ratio (CAR): .................................................................................................................... 23
Risk Based Capital Adequacy: ..................................................................................................................... 23
Risk Weighted Assets (RWA): ..................................................................................................................... 24
Basel III : ........................................................................................................................................................... 24
Changes after implementation of Basel III :............................................................................................. 25
Economic Rationale of Credit Rating : ........................................................................................................... 25
Best Practices in Credit Rating Industry : ...................................................................................................... 27
Best Practices recommended by ADB : ...................................................................................................... 27
Best Practices advocated by ACRAA : ........................................................................................................ 28
Best Practices advocated by International Organization of Securities Commissions (IOSCO) : ....... 28
Performance of DCRA of Bangladesh regarding best practice of compliance : ................................... 29
Emergence of ACRAB : ................................................................................................................................. 29
Credit Rating vs. Auditing : .............................................................................................................................. 30
Criticisms of Credit Rating Agencies : ............................................................................................................ 32
Current Scenario in Bangladesh : ................................................................................................................... 33
Summary and Recommendations : ................................................................................................................ 34
Recommendations: ....................................................................................................................................... 34
Emerging Credit Rating Ltd. – A Brief Profile ................................................................................................ 36
References .......................................................................................................................................................... 37
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Introduction:
This paper is written on the roles and functions of Domestic Credit Rating Agencies (DCRAs) in
Bangladesh. This paper addresses definition of credit rating and its benefits, methodology followed
by DCRAs, context of Basel II, current practices in Bangladesh and recommendation thereon. With
the implementation of Basel II (introduced in Bangladesh by BRPD Circular No- 09, published on
December 31st 2008), in the context of Pillar 1, regulatory capital requirements for credit risk is
calculated according to two alternative approaches: (i) the Standardized Approach; and (ii) the
Internal Ratings-Based Approach. The Standardized Approach is generally conducted worldwide by
independent Credit Rating Agency (CRA) who is licensed by domestic regulators (Bangladesh
Securities and Exchange Commission (BSEC) and Bangladesh Bank (BB) in Bangladesh). Recent
scandals and events has reinforced the need for strict framework and regulatory awareness to
various banks nationwide which furthermore extends the requirement and support of DCRAs to
operate and execute credit rating efficiently. BRPD Circular No- 18 (published on December 21,
2014) issues a roadmap for implementation of Basel-III in Bangladesh and also additional BRPD
Circular No- 01 (published on January 01, 2014) issues external DCRA‟s to perform credit rating of
Small and Medium Enterprise (SME). Therefore the need for DCRAs in a drive to develop the
financial system of Bangladesh is evermore growing.
Credit rating is an independent opinion on ability of a business or a government to repay its debt
obligations. Hence CRAs act as corporate gatekeepers to bridge the gap of asymmetric information
between lenders, investors and issuers about the creditworthiness of companies or business.
What is Credit Rating?
Credit rating is the assessment of the credit worthiness of a particular borrower with reference to a
particular debt or financial obligations. Ability to pay debt is known as “creditworthiness”.1Credit
Rating usually appears in form of alphabetical letter grades such AAA, A+,BBB etc.2 Usually a credit
rating grade is inversely proportional to default risk which means higher the grade lower the risk. A
credit rating can be assigned to any institution that intends to borrow money; any individual,
government, proprietorship business, partnership business, company or a government institution
may opt for credit rating for the purpose of borrowing funds. These are known as entity ratings.
Credit Rating is also applicable for the issuance of commercial papers such bonds; however credit
rating is not applicable for issuance of common stock. Typically the entity who is applying for credit
rating is known as obligor.
An article of S&P states “From a slightly different perspective, credit ratings are a specialized type of
securities research, similar to what independent securities analysts and analysts at sell-side firms
produce. Like such research, credit ratings embody forward-looking opinions designed to contribute
to an investor's decision-making process. However, instead of providing opinions about the overall
1 Rating agencies (and other credit professionals) hold differing views of what constitutes "creditworthiness" or "credit
quality." In broad terms, each explains its view in the definitions of its rating symbols. For an explanation of how Emerging Credit Rating Limited defines creditworthiness, visit www.emergingrating.com 2 Different credit rating institution uses different credit rating scales.
Domestic Credit Rating – Operation and Effectiveness in Bangladesh | 6
investment merit of specific securities or types of securities (which embodies many different
dimensions, including creditworthiness), a credit rating addresses creditworthiness only. Accordingly,
credit rating agencies operate only in the fixed-income arena, while securities analysts cover the
entire landscape of the capital markets.”3 In addition Peterson [2013] states that an ideal credit
rating should have three major attribute : (i) transparent, (ii) comparable and (iii) forward looking.
What Credit Rating is Not :
Credit Rating only takes financial risk into account and does not consider other risks. One should not
use credit rating as investment advice and should not hold it as recommendation to buy, sell or hold
securities. According to the president of Standard & Poor‟s Douglas L Peterson “Credit Rating
addresses only one aspect of a debt instrument-credit quality”.
Substituting Ratings for Independent Analysis :
US Securities and Exchange Commission advices in one of its publications that credit rating should
be used as supplement and not replacement of an investor‟s own research.4 Using credit rating as
an independent analysis may not give the full picture of an investment as credit worthiness is only
one of the factors which should be considered during making an investment decision. Depending on
the circumstances other factors may arise such as risk free rate, taxability of interest rate, market
technical, structural complexity etc.
Who Can Perform Credit Rating :
Credit Rating Agencies performs credit rating assignments of various entities and debt instruments.
In Bangladesh they are known as External Credit Assessment Institution (ECAI). Elkhoury [2008]
explains that rating agencies falls into two categories: (i) recognized; and (ii) non recognized. The
former are recognized by supervisors in each country for regulatory purposes. In Bangladesh there
are four regulatory authorities: (i) Bangladesh Securities and Exchange Commission; (ii) Bangladesh
Bank; (iii) Insurance Development and Regulatory Authority of Bangladesh; and (iv) Association of
Credit Rating Agencies in Bangladesh. First two regulatory authorities recognize the following eight
local credit rating agencies5:
I. Emerging Credit Rating Ltd (ECRL): ECRL was incorporated in March 2009, with the
view of providing Credit Rating Services in Bangladesh. ECRL obtained credit rating license
from BSEC in June 2010 as per Credit Rating Companies Rules 1996 and also received
Bangladesh Bank Recognition as an External Credit Rating Institution (ECAI) in October
2010. On March 2009 ECRL also established technical collaboration with Malaysian credit
rating company named Malaysian Rating Corporation Berhad (MARC). The company has its
head office in Dhaka and regional offices in Khulna and Chittagong (further details in page
36).
II. Credit Rating Association of Bangladesh Ltd (CRAB): CRAB was established in 2003
and received license from BSEC in 2004. The company has technical collaboration with ICRA,
India. Its head office is situated in Dhaka and the regional offices are in Bogra and
Chittagong.
3 “The Role of Credit Ratings in The Financial System”, May 2012.
4 “The ABCs of Credit Ratings”, SEC Pub. No. 161(10/13).
5 The ECAI descriptions are taken from their websites
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III. Credit Rating Information and Services Ltd (CRISL):CRISL was formed in
1995 as a joint venture between RAM Holdings Malaysia Berhad (RAM), JCR-VIS Credit
Rating Company of Pakistan, few financial institutions and some professionals of Bangladesh.
CRISL‟s head office is situated in Dhaka and it also has two more regional office one in
Chittagong and the other one in Khulna.
IV. National Credit Rating Ltd. (NCRL): Incorporated as a public company, NCR started its
business in 2010 after obtaining license from BSEC. The company has technical collaboration
with Pakistan Credit Rating Agency (PACRA).
V. Alpha Credit Rating Ltd. (ALPHA):ALPHA was incorporated in February 2011. Istanbul
International Rating Services Inc. acts as the technical partner. It has one office in Dhaka.
VI. WASO Credit Rating Company (BD) Ltd. (WASO): WASO started its journey in
February, 2012 with acquiring license from Bangladesh Securities and Exchange Commission
(BSEC) and finally has been recognized by Bangladesh Bank as and ECAI in October 2012.
WASO also has the technical collaboration with Financial Intelligence Services Ltd. (FISL).
WASO has one office in Dhaka.
VII. Argus Credit Rating Services Ltd. (ARGUS): Argus started its journey in 2011 as a joint
venture between Singapore based credit rating company DP Information Group (“DP”) and
local sponsors. The company has one office in Dhaka.
VIII. The Bangladesh Rating Agency Ltd. (BDRAL)[1]: BDRAL is a subsidiary of Dun &
Bradstreet South Asia Middle East Ltd.It obtained license in 2012 and for only to do the SME
Rating. The company has one office in Dhaka.
Apart from these Credit Rating Agencies the Bangladeshi Regulatory Authorities also recognizes the
following international credit rating agencies mainly for sovereign rating.
I. Standard & Poor’s (S&P): S&P is considered one of the Big 3Credit Rating Agencies,
which also include Moody's Investor Service and The Fitch Ratings. It has 26 offices around
the world, and the head office is located on 55 Water Street in Lower Manhattan, New York
City. Standard & Poor's Ratings Services publishes more than a million credit ratings on debt
issued by sovereign, municipal, corporate and financial sector entities. In 2013, it rated $6.6
trillion worth of new debt.
II. The FitchRatings: The firm was founded by John Knowles Fitch on December 24, 1913 in
New York City as the Fitch Publishing Company. It merged with London-based IBCA Limited
in December 1997. In 2000 Fitch acquired both Chicago-based Duff & Phelps Credit Rating
Co. (April) and Thomson FinancialBankWatch (December). Fitch Ratings is the smallest of the
"big three" NRSROs, covering a more limited share of the market than S&P and Moody's,
though it has grown with acquisitions and frequently positions itself as a "tie-breaker" when
the other two agencies have ratings similar, but not equal, in scale.
III. Moody’s Investor Service (Moody’s): Moody's was founded by John Moody in 1909 to
produce manuals of statistics related to stocks and bonds and bond ratings. In 1975, the
company was identified as a Nationally Recognized Statistical Rating Organization (NRSRO)
by the U.S. Securities and Exchange Commission. Following several decades of ownership by
[1]
BDRAL only has license for performing SME rating. Others may perform all kinds of rating.
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Dun & Bradstreet, Moody's Investors Service became a separate company in 2000;
Moody's Corporation was established as a holding company.
Who are the Regulators?
The U.S. Congress passed the Credit Rating Agency Reform Act of 2006, allowing the United States
Securities and Exchange Commission (SEC) to regulate the internal processes, record-keeping and
certain business practices of CRAs. The Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010 further grew the regulatory powers of the SEC, including requiring a disclosure of credit
rating methodologies. The European Union has never produced a specific or systematic legislation or
created a singular agency responsible for the regulation of CRAs. There are several EU directives,
such as the Capital Requirements Directive of 2006, that affect rating agencies, their business
practices and their disclosure requirements. Most directives and regulations are the responsibility of
the European Securities and Markets Authority. For Domestic CRA of Bangladesh‟s regulatory
agencies and their guidelines are listed below:
Bangladesh Securities and Exchange Commission(BSEC) :
Bangladesh Securities and Exchange Commission (BSEC) has been one of the prime regulators for
CRA, along with the authority to issue license and quarterly monitoring of CRA‟s, it also oversees the
compliance requirement and rules laid down by Credit Rating Companies Rules 1996.
Credit Rating Companies Rules 1996
Credit Rating Companies Rules 1996 has been in effect from July 2006 conferred by Securities and
Exchange Ordinance 1969 to regulate the business of Credit Rating Companies. This rules states
that no issue of debt at a premium shall be made by an issuer unless the issue is rated by a credit
rating company and declaration about such rating is given. Credit Rating Company has been defined
in the rules as an investment adviser company which intends to engage in or is so engaged primarily
in the business of evaluation of credit or investment risk through a recognized and formal process of
assigning rating to present or proposed loan obligations or equity of any business enterprise. The
rules give basic guidelines such as eligibility for registration and states that a company proposing to
commence business as a credit rating company shall be eligible for registration if: (a) such a
company is incorporated as a public limited company (b) such company have paid up capital of at
least 50 lakh taka (c) such company has technical collaboration arrangement with a reputed credit
rating company and others.
The rules further provides for registration procedure in Rule 5 and power of the Commission to
cancel or suspend registration in Rule 6. Through Rule 8, the Commission made it compulsory for all
credit rating companies to submit its quarterly reports in writing to the Commission. Rule 9 has been
inserted vide Notification No. SEC/CMRRCD/2001-27/01 dated November 17, 2009, which includes
operation procedures of credit rating companies to be adopted. It includes requirements for
improving quality of rating process, monitoring and updating operation of Credit Rating Company,
requirements for standard agreement, requirements for improving integrity of rating process,
independence of employees and defines conflict of interest, procedures and policy to be followed by
Credit Rating Company, transparency and timeliness of rating disclosure, on treating confidential
information, communicating with market participants about Credit Rating Company.
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The rules require Companies to establish rating methodologies and disclose to its website. All
analysts are required to use them duly and Rating Committee (consisting of 5 members) shall review
the rating criteria at least once every year and amend the rating methodology if necessary. The
review shall be made with the outcome of internal and external research, best practice and historical
experience. Not only those, companies are also required to prepare written procedures for obtaining
rating and disclose such procedures to its website. The rating companies shall ensure that it has
sufficient number of rating analysts having appropriate knowledge, skill, experience and access to
sufficient quality information. If any rating involves a type of financial product with limited historical
data, analyst shall disclose clearly the limitations in the rating report. Rating teams shall be
composed of at least two analysts in order to make objective assessment with different viewpoints.
Also, an Internal Review Committee (IRC) comprising of appropriate professionals shall double check
the documents and information on which the analysts make ratings. Further to this, rule 10 deals
with powers of the Commission to inspect and investigate Credit Rating Companies.
Limitations of Credit Rating Companies Rules 1996:
Rule 6 mentions that the Commission has power to cancel or suspend the registration of a credit
rating company if the company has contravened any provision or has otherwise failed to comply
with any requirement of the 1969 Ordinance or any rules given by the Commission if it considers
necessary in the public interest to do so. There are many rules in Credit Rating Companies Rules
1996 which have been made according to international standard practice but which need to be
revised or rephrased according to practical scenario of Bangladesh. Hence, it is not possible to fulfill
all the requirements of the rules and contravention of such rules may make it liable to have
registration cancelled. It may be proposed to the Commission to make an amendment to the rules to
incorporate more definite and concrete situations where credit rating companies can have their
registration cancelled or suspended.
No definition/description has been given of compliance report submission in rule 4(g). Compliance
issues have not been defined properly and work of a compliance officer needs to be addressed
more. Professional qualification has not been described in the rules such as analyst when
reviewing/analyzing or rating a certain company or an industry, their level of qualification has not
been described in details. This is a major issue which needs to be addressed in more details.
Bangladesh Bank (BRPD):
Credit Rating Companies (“Company”) are also being regulated by Bangladesh Bank through various
circulars, policy and guidelines. To perform credit assessment, credit rating companies must be
recognized as an External Credit Assessment Institution (ECAI) under the Risk Based Capital
Adequacy Framework (Basel II) issued by Bangladesh Bank. Through this recognition, companies
must comply with certain requirements. Those requirements are that credit worthiness rating
assessed should be independent, consistent and free from conflict of interest. Further to that, it is
suggested that rating methodology should cover at least analysis of the risk factors supported by
scoring as approved by Bangladesh Bank. The company should maintain an undisrupted and
continuous database management system using both solicited and unsolicited credit ratings. The
recognition given by Bangladesh Bank will be reviewed annually and it is expected that
Domestic Credit Rating – Operation and Effectiveness in Bangladesh | 10
methodologies and credit assessments remain appropriate over different periods of time
and in case of changes in market conditions. The company is also required to disclose credit rating
reports of related parties quarterly to the Bangladesh Bank after the assessment is final.
Other than the recognition, credit rating companies are also governed by the circulars and guidelines
issued by Bangladesh Bank from time to time. Banking Regulation and Policy Department (BRPD)
issued Circular No.05 dated May 29, 2004 which made it mandatory for the banks to have
themselves credit rated to raise capital from capital market through IPO. Further to that, from
January 2007, in BRPD Circular No. 07 dated July 05, 2006 it has been decided for all banks to have
themselves credit rated by a Credit Rating Company. Such credit rating reports of the banks will be
submitted to Bangladesh Bank and non-compliance of any provision of the circular will be a breach
of Banking Companies Act 1991.
Another circular issued by Bangladesh Bank is BRPD Circular No. 01 dated January 01, 2014
regarding Small and Medium Enterprises (SME). Bangladesh Bank has developed a “Credit Rating
Methodology for Small and Medium Enterprises” which will ensure uniformity, larger levels of
transparency of external credit assessment and thereby determine the relative creditworthiness of
entities belonging to this segment. The credit risk assessment in this segment requires a specific
approach, as the factors affecting the creditworthiness differ from those compared to large
corporate entities and other institutions.
Limitationsof Bangladesh Bank Regulations:
Although Bangladesh Bank states in its recognition that credit rating companies should perform their
rating assessment free from any conflict of interest, however, the term “conflict of interest” has not
been defined anywhere in circulars or policy or any guidelines. It is also not clear whether all the
credit rating reports should be sent to Bangladesh Bank or not. Since, in the recognition given by
Bangladesh Bank, it is mentioned that disclosure should be made of credit rating reports of “related
parties” quarterly to the Bangladesh Bank. In the recognition given, “related parties” is not given
any clarified meaning.
Insurance Development and Regulatory Authority (IDRA):
For credit rating assessment of insurance companies, the respective regulatory authority is
Insurance Development and Regulatory Authority Bangladesh (IDRA). To perform credit assessment,
credit rating companies can be recognized as a Credit Rating Institution by IDRA. Circular of Chief
Controller of Insurance No. 21/21/98-376 dated 27 March 2007 requires all general insurance
companies to get credit rating assessment once a year and all life insurance companies to get credit
rating assessment every two years. Further to that, a circular issued by Banking Regulation and
Policy Department (BRPD) No.06 dated March 13, 2011 also made it mandatory for general
insurance companies to get credit rating assessment.
Types of Credit Rating Performed by DCRAs Operating in Bangladesh
While carrying out a Credit Rating assignment, the process is guided by rating methodology which
sets the framework to execute credit rating analysis. Keeping in mind the various industry segment
and client requirements, the following types of credit rating is practiced.
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Corporate Debt
Corporate Debt Rating is an analysis of the issue structure and terms on the other hand would
evaluate the suitability of the instrument in the context of the Company‟s business model and
financial profile. Also evaluated are the competencies and track record of management and other
qualitative factors such as parent strength, formal support agreements and ownership. Industry
outlook is considered to evaluate the level of risk involved in participating in a particular business or
businesses. Some of the pertinent factors out of the many to be considered would be demand
growth, pricing flexibility, research and development requirements, barriers to entry and regulatory
framework where appropriate, and benefits of diversification. The ratee‟s sensitivity to economic
cycles will require more conservative financial profiles/ policies on the part of the ratee to offset its
inherent earnings variability. This form of rating assesses the probability of timely repayment of
principal and payment of interest over the term till the maturity of such debts.
Entity
The common methodology used to analyze Corporate Debt Rating can be similarly applied to Entity
Rating. This form of rating assesses the probability of timely repayment of principal and payment of
interest over the term till the maturity of all debt obligations that the entity hold at that date. Since
it not only analyzes the individual characteristics of a particular borrowing based on their specific
structure, and terms and conditions, therefore it does not comment on each individual borrowing;
instead entity rating gives a generalized opinion on all borrowings of the rated entity. This form of
rating also includes IPO (Initial Public Offering) rating.
Financial Institutions
Financial Institution Ratings are applied to assess the creditworthiness of financial institutions (FI).
The FI rating process works through sovereign and macro-economic issues; the financial sector
outlook and regulatory trends; the FI‟s business profile (including strategy); and eventually to the
CAMELS rating components. The CAMELS framework that is also employed by national bank
regulators is largely supported by both theoretical and empirical literature and comprises capital
adequacy, asset quality, management quality, earnings, liquidity and sensitivity to market risk.
Insurance Rating
This form of rating assesses the credit-worthiness of insurance companies, both general and life
insurance, i.e. the financial security characteristics of the insurance company and its ability to meet
its policy holder obligations.
1. General Insurance
It assesses the financial security characteristics of an insurance company with respect to its
ability to meet its obligations to policyholders in accordance with the terms of their insurance
contracts. When rating insurance companies, analyst‟s consider macroeconomic factors,
industry dynamics including regulatory issues, and individual company performance. The
analyst examines how economic factors affect the company‟s growth opportunities and
financial condition. In-depth analyses are then made of the insurer‟s business, management
and corporate strategy, operating and underwriting performance, investment, liquidity,
capitalization, reserves and reinsurance arrangements.
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2. Life Insurance
The common methodology used to analyze general insurers can be similarly applied to life
insurers. Life companies display inherently superior operating stability compared to general
insurers due to the high degree of predictability of claims outcome using mortality and
morbidity tables. The life industry has been experiencing softening demand for the more
traditional protection policies, with shifting consumer preference towards savings and
investment products. Also gaining popularity are products covering critical illness and medical
care, due to the concern over the rising cost of health care.
Project Finance
Generally, project finance involves raising of funds to finance a project (usually with limited
recourse) in which the investors or providers of the funds focuses on the future cash flows from the
project (usually secured through an off take agreement) which serve as the primary source of funds
to service and repay the loans taken to finance the project and/or provide the return on their equity
invested.
The ability to repay principal and interest in a timely manner, which is what analyst‟s rate, is
dependent on the success of a single specific project or a series of project facilities. The project
rating focuses on identifying specific project risks, understanding how they affect credit quality and
assessing the strength of mitigating measures.
Small and Medium Enterprises (SME)
The rating of Small and Medium Enterprises (SME) indicates relative level of creditworthiness of an
SME entity in relation to other SMEs. This form of rating considers these factors among others:
industry characteristics, operating efficiency, competitive position, management quality, financial risk
characteristics, relationship with lenders and capital structure to evaluate overall risk profile of the
SME entity.
Credit Rating Methodology
Credit Rating Methodology is the manual or set of guidelines which is used to rate a company. Based
on these guidelines a score sheet is developed and is used for credit rating purpose. At first the
ECAI prepares the credit rating methodology and score sheet then submits it to the Regulatory
Authorities for the purpose of gaining approval. After gaining approval the ECAI posts its rating
methodology in the website. Different credit rating methodologies are designed keeping different
objectives in mind; Bhatia [2002] explains that sovereign rating methodology of S&P‟s rating seeks
capture only the probability of the occurrence of default, not the severity of default and provides no
assessment of expected time in default, mode of default resolution, or recovery values more
generally. Moody‟s rating focus on expected loss, which is a function of both probability of default
and the expected recovery rate, after default has occurred. Fitch ratings are hybrid focusing on
probability of default until the point default has occurs, and differentiating on the basis of expected
recovery rates after default has occurred.
To avoid this specific problem sometimes the regulatory authority lays down guideline for designing
methodology. For example Bangladesh Bank Circular stated “Both quantitative and qualitative
factors should be considered in assessing the SME operation. The methodology is comprehensive
where assessment area concentrates five broad categories– Financial Risk, Business/Industry Risk,
Domestic Credit Rating – Operation and Effectiveness in Bangladesh | 13
Management Risk, Bank Relationship Risk, Financial Security Risk and others. Although, the
above concentration areas are in line with corporate rating methodology, the relative weightage for
different parameters may differ in between the two sectors. The financial position (i.e. Balance
Sheet and Income Statement) and Cash flow Statement may be collected as per accounting
Standard provided by concerned regulators that may either be audited or signed by the appropriate
authority. “6
Credit Rating Evaluation Process
Credit rating is an independent opinion on ability of a business or a government to repay its debt
obligations. Since the assignment itself entails a vast arena of information and analysis, data
collection and research forms the base of the evaluation process.
Information Collection
Information collection is in the form of both primary and secondary information. Once a legal
agreement is formed between the client and CRA, the CRA initiates the process of collecting
information. Since modernization and the use of accounting law and guidelines were neglected by
previous generation owners, the visibility of income and expense is blurred by various clients to
restrict disclosure of information. It is also observed in various times that many client also produces
several financial statements each to cater different purpose7. Moreover, it has also been witnessed
that many limited companies although are required to prepare audited financial statements are not
abiding by the rule set out by The Companies Act 19948. However, imposition of banking and
various association rules to some extend have tutored local businesses to maintain a certain set of
paperwork which needs to be further refined to help the flow of information and its visibility.
Contrasting this scenario to the practice followed internationally, many Asian countries face the
6 “Amendment of Guidelines of Risk Based Capital Adequacy (RBCA)”, January 2014
7 “Regulators Must Enforce Ethical Standard In the Business”, The Daily Star,2014
8Credit Rating Companies Rules 1996
Collect Information
Data Input, Analysis, Scoring &
Review
Approval from
Rating Committee
Draft Sent
Final Report Print, Delivery & Published to
Authority
Domestic Credit Rating – Operation and Effectiveness in Bangladesh | 14
same scenario, whereas most Western Countries face relative ease in collection of
authenticated information.
Data Input, Analysis, Scoring & Review
Subsequent to collection of valid and relevant information from every possible source, the CRA
incorporates it into the software or specially designed format which has been acquired from the
CRA‟s International Technical partner. Once incorporated, the formats generate various aspect of
analysis, however, physical verification, information obtained from industry, peers, banks,
government institutions, etc. are also incorporated to form an overall understanding of the business
in the current context in addition to understanding its future position. During this stage, CRA‟s make
use of various financial models; whichever fit in the context of Bangladesh, to present their
analytical findings.
Rating Score Sheet :
Risk Variables Weighting Initial Total Remarks
1.0 Industry Analysis
Industry Outlook 10.00% 2.5
0.25
Stock Market Review 5.00% 1.75 0.09
2.0 Business Risk Analysis
Market Outlook 10.00% 1.75
0.18
Competitive / Industry position 10.00% 1.00
0.10
Operating Risk 15.00% 1.25
0.19 3.0 Financial Risk
Profitability
15.00% 1.25
0.19
Liquidity & Financial Flexibility 10.00% 1.25
0.13
Capital Structure 5.00% 1.75
0.09
Cashflow Coverage 10.00% 1.25
0.13
4.0Management and Other Qualitative Factors 10.00% 1.50
0.15
Weighted Score 100.00% 15.25
1.48
RATING AAA
Domestic Credit Rating – Operation and Effectiveness in Bangladesh | 15
Score To Notch/Rating Symbol:
Score Definition Rating Weighted Score
AAA 1.00 - 1.50
1.00 Well Below Average Risk
AA + 1.51 - 1.75
1.25
AA 1.76 - 2.00
1.50
AA- 2.01 - 2.25
1.75
Below Average Risk A+ 2.26 - 2.50
2.00
A 2.51 - 2.75
2.25
A- 2.76 - 3.00
2.50
Average Risk
BBB+ 3.01 - 3.20
2.75
BBB 3.21 - 3.40
3.00
BBB- 3.41 - 3.60
3.25
BB+ 3.61 - 3.80
3.50
BB 3.81 - 4.00
3.75 Above Average Risk
BB- 4.01 - 4.20
4.00
B+ 4.21 - 4.40
4.25
B 4.41 - 4.60
4.50
Well Above Average Risk B- 4.61 - 4.80
4.75
C 4.81 & Above
5.00
D Not Classified
The meaning of the each rating symbol or notch is enumerated in two tables in the next page.
Domestic Credit Rating – Operation and Effectiveness in Bangladesh | 16
Meaning of Rating Symbols:
AAA - Ability to repay principal and pay interest on a timely basis is extremely high
AA - Very strong ability to repay principal and pay interest on a timely basis
A - Ability to repay principal and pay interest is strong
BBB - The lowest investment grade category; indicates an adequate capacity to repay principal and pay interest
BB - While not investment grade, this rating suggests that likelihood of default is considerably less than for lower-rated issues.
B - Indicates a higher degree of uncertainty, and therefore, greater likelihood of default.
C - High likelihood of default, with little capacity to address further adverse changes in financial circumstances.
D - Payment in default.
High
Low
AAA Extremely Strong
AA Very Strong
A Strong
BBB Adequate
BB Less Vulnerable
B More Vulnerable
CCC Currently Vulnerable
CC Currently Highly Vulnerable
D Default
Domestic Credit Rating – Operation and Effectiveness in Bangladesh | 17
Rating Outlook:
Rating Outlook
DCRA‟s Rating Outlook assesses the potential direction of a particular Rating over the intermediate
term (typically over one to two-year period). The Rating Outlook may either be :
POSITIVE which indicates thata rating may be raised;
NEGATIVE which indicates that a rating may be lowered;
STABLE which indicates that a rating is likely to remain unchanged; or
DEVELOPING which indicates that a rating may be raised, lowered or remain unchanged.
Rating Committee :
Once all the findings and analysis is concluded, it is presented to a selected board of members in
Rating Committee9. It comprises of appropriate professionals who shall double check the documents
and information on which the analysis was made. The credit rating report is scrutinized along with
sources of information, physical verification, analysis method, business perspective, etc. Once the
board is convinced on the due diligence during analysis of the client, the board approves a
designated Credit Rating Grade, which justifies the client‟s creditworthiness.
Reporting :
As the rating process concludes and the board has approved a Credit Rating Grade, the report is
sent to the client by means of electronic mail. Once the report reaches the client, they mostly place
meeting to discuss the reasons for the assigned grade. In case of various big clients, such as group
of industries, banks, insurance, etc., several meetings are conducted between different segments of
management to discuss various issues. Many such issues are the source of information and their
authenticity and reliability, any misunderstanding of operating process that may have happened,
eagerness to provide various documents which were not provided to CRA initially when requested.
Once all the issues are addressed by both parties, the report is confirmed by the client to proceed to
the next step.
Before proceeding to the next step, it is necessary to address the fact that worldwide every
professional firm faces the threat of self-interest. Since the client is the one who pays to the
professional firm or in this case CRA, and the CRA is analyzing the same client, clients may often try
to induce the CRA in occasions. And to safeguard this threat, international associations and national
regulators and associations are designed to obstruct such event. Moreover, the Domestic CRA‟s are
required to appoint a Compliance Officer10 to oversee these issues within the CRA.
9Credit Rating Companies Rules 1996
10 Credit Rating Companies Rules 1996
NegativDeveloping
Domestic Credit Rating – Operation and Effectiveness in Bangladesh | 18
The report is then discussed with client and finalized. Once the report is printed, CRA
publishes the credit rating and incorporates the grades in all necessary reporting made to various
regulatory body. However, the responsibility of the CRA still remains after completion of the credit
rating assignment. The CRA needs to be at continuous watch as to whether the assigned grade is
still applicable to the designated client. If any occasion occurs when the grade is no longer
applicable to the client, the CRA has to follow certain step to revoke the assigned grade. Apart from
continuous watch, the CRA is also liable to carry out surveillance review (next consecutive 3 years as
per BSEC Law) every year of rating.
Benefits of Credit Rating :
Credit Rating provides various benefits such as it gives insight of financial health of a company.
Since financial risk analysis is a major component of a credit rating report, reading this particular
section will give the user an idea how sound the financial health of the obligor is.11 Another benefit
of credit rating is that its comparable, if two obligor operating in the same industry is rated and the
grades are presented to an investor; simply by taking the grades into account the investor shall
understand which obligor has higher risk. This is why credit rating particularly helpful for an issuer
with little or no credit history (new company or a company which never borrowed before), as less
well-known issuers gains market access by having information and analysis of their credit widely
available on a comparable basis [Peterson, 2013].
Reduction of information asymmetry is another primary benefit of credit rating which was farther
explained by Adelson [2012] with an example “Posit that every car is either good (a "creampuff") or
bad (a "lemon"). The buyer of a new car doesn't know before his purchase whether the car is a
creampuff or a lemon. Rather, he gains that knowledge after owning the car for a sufficient period
of time (say, a year).
Now suppose that the owner of a creampuff wants to sell his car, and that a used creampuff is really
worth $10,000, while a used lemon is worth only $2,000. The owner knows that his car is a
creampuff, but potential buyers do not. As such, potential buyers, concerned that the car could be a
lemon, will be unwilling to pay $10,000 for it. If there is a chance that the car could be either a
creampuff or a lemon, buyers might be willing to pay some price between $2,000 and $10,000.
However, buyers will also figure out that sellers will be reluctant to sell creampuffs if they can't
realize what the cars are worth, which means that most or all of the used cars offered for sale will
be lemons. Accordingly, buyers will likely refuse to pay more than $2,000 for a used car. Thus, the
seller of a used creampuff would likely be unable to get a buyer to pay the fair price. The whole
problem boils down to information asymmetry between the seller and the buyer: The seller knows
whether the car is a lemon or a creampuff, while the buyer lacks that knowledge.
A simple theoretical application of the lemons principle in credit markets might go as follows:
Lenders, in the role of potential used-car buyers, would be unable to distinguish high-risk borrowers
(lemons) from low-risk borrowers (creampuffs). Therefore, a lender would charge all borrowers the
same rate of interest: the one necessary to cover the risk of lending to a high-risk borrower. Just
11
It should be noted that different credit rating companies use different credit rating methodology so the level of financial insight will differ from company to company.
Domestic Credit Rating – Operation and Effectiveness in Bangladesh | 19
like the seller of a creampuff could expect to sell his car only for the price of a lemon, a low-
risk borrower would have to pay the same interest rate as a high-risk one. In such a situation, the
volume of borrowing by low-risk borrowers would suffer, and lenders would misallocate productive
resources away from low-risk borrowers. This suggests that economic output would be suboptimal.”
Credit Rating helps to avoid this problems as it distinguishes between low risk borrowers and high
risk borrowers through assigning them appropriate grades so the lenders gets an idea of proper
allocation of funds.
BASEL II and Credit Rating :
Roy [2005] states that “In May 2003, the Basel Committee on Banking Supervision released its third
- and final – consultative paper on the New Basel Capital Accord, which is meant to replace the 1988
capital adequacy framework by a more risk-sensitive approach. One year later, on June 26, 2004,
central bank governors and the head of bank supervisory authorities from the G-10 countries
endorsed the new framework commonly known as Basel II”12. The Basel Committee has developed
two approaches for calculating regulatory capital for credit risk, the so-called “standardized
approach” and “internal ratings based approach” (hereafter IRB). The standardized approach uses
external ratings such as those provided by ECAI to determine risk-weights for capital charges,
whereas the IRB allows banks to develop their own internal ratings for risk-weighting purposes
subject to the meeting of specific criteria and supervisory approval. Large International Financial
Institution usually opts for IRB however the small and medium financial institution does not have
necessary funds to adapt IRB so it usually chooses standardized approach to calculate regulatory
capital risk.
Basel II in Bangladesh :
Bangladesh Bank (BB) is the central bank of Bangladesh and governs all the active performing
commercial banks in the country. Considering the persistent complexity and diversity in the banking
industry and to make the bank‟s capital more risk sensitive and shock absorbent, Bangladesh Bank
has introduced Risk Based Capital Adequacy guideline relating to the Basel II Accord. In compliance
to international standards Bangladesh Bank has made the guidelines statutory for all scheduled
banks in Bangladesh from January 01, 2010. Basel II attempts to integrate Basel capital standards
with national regulations, by setting the lowest capital requirements of financial institutions with the
goal of ensuring organization or Institution liquidity.
These guidelines are structured on following three aspects or PILLARS
12
Details of BASEL II in Bangladesh will be explained in a later chapter
Domestic Credit Rating – Operation and Effectiveness in Bangladesh | 20
PILLAR 1:
Minimum capital requirements to be maintained by a bank against credit, market, and operational
risks.
Regulatory Capital as calculated for three major components including:
I. Credit Risk ,as calculated by one of three approaches, including:
a) Standard Approach for Internal Rating Based Approaches (IRB)
b) Foundation Approaches IRB
c) Advanced Approach IRB
II. Operational Risk consists of three components, which are:
a) Basic Indicator Approach (BIA),
b) Standardized Approach (SA), and
c) Internal Measurement Approach
III. Market Risk is calculated by Value at Risk
PILLAR 2:
Process for assessing the overall capital adequacy aligned with risk profile of a bank as well as
capital growth plan. It deals with the regulatory responses to the first pillar. It also provides a frame
work for dealing with all the other risks a bank may face. Such as system risk, pension risk,
BASEL II CAPITAL ACCORD
Pillar 1.
MINIMUM CAPITAL REQUIREMENTS
•Sets minimum acceptable Capital Level
•Enhanced approach for - - credit risk -Public rating -Internal Ratings -Mitigation
•Explicit Treatment of Operational Risk
•Market risk framework, capital definition/ratios are unchanged.
Pillar 2. SUPERVISORY REVIEW OF CAPITAL ADEQUACY
•Banks must assess solvency vs. risk profile
•Supervisory review of bank's calculations & capital strategies
•Banks should hold in excess of minimum level of capital
•Regulators will intervene at an early stage if capital levels deteriorate
Pillar 3.
MARKET DISCIPLINE
•Improved disclosure of capital structure
•Improved disclosure of risk measurement and management practices
•Improved disclosure of risk profile
•Improved disclosure of capital adequacy
Domestic Credit Rating – Operation and Effectiveness in Bangladesh | 21
concentration risk, strategic risk, reputational risk, liquidity risk and legal risk, which the
accord combines under the title of residual risk. It gives banks a power to review their risk
management system.
PILLAR 3:
This guides the framework of public disclosure on the position of a bank's risk profiles, capital
adequacy, and risk management system. Market discipline is based on enhanced disclosure of risk.
This may be an important pillar due to the complexity of Basel. Under Basel II, banks may use their
own internal models but the price of this is transparency. Information to be disclosed includes:
I. Available capital in the group, capital structure, detailed capital requirements for credit risk;
II. Breakdown of asset classification and provisioning
III. Breakdown of portfolios according to risk buckets and risk components
IV. Credit risk mitigation (CRM) methods and exposure covered by CRM
V. Operational risk
Assessment of Capital Adequacy is carried out in conjunction with the capital Adequacy reporting to
the Bangladesh Bank and following approaches were pursued to calculate Minimum Capital
Requirement:
I. Credit Risk- Standardized Approach (SA) :
Credit Risk is the possibility that the borrower or counterparty will fail to meet its obligations
in accordance with agreed terms. Bank‟s claim will include loans and advances to and
deposits in local and foreign currency to other banks, central bank and other local and
international institution which include International Monetary Fund (IMF), World Bank, Asian
Development Bank (ADB), and etc. Assets in non-bank financial institutions (NBFIs),
corporate, retail and SME will also have to be counted.
II. Operational Risk- Basic Indicator Approach (BIA) :
It is defined as the risk of loss resulting from inadequate or failed internal processes, people
and systems or from external events. This definition includes legal risk but excludes strategic
and reputational risk (BB, 2010, pp45). For calculating operational risk capital charges there
are two types of approaches- The basic indicator Approach, The Standardized Approach.
III. Market Risk- Standardized Approach (SA) :
Market risk is defined as the risk of losses in on and off-balance sheet positions arising from
movements in market prices. The market risk positions subject to this requirement are:
a) The risks pertaining to interest rate related instruments and equities in the trading
book; and
b) Foreign exchange risk and commodities risk throughout the bank (both in the banking
and in the trading book) (BB, 2010, pp 15).
In Standardized Approach, the capital requirement for various market risks (interest rate risk, equity
price risk, commodity price risk, and foreign exchange risk) is determined separately. The total
capital requirement in respect of market risk is the sum of capital requirement calculated for each of
Domestic Credit Rating – Operation and Effectiveness in Bangladesh | 22
the market risk sub-categories such as interest rate movements, adverse price movements
of securities, foreign exchange, repo reverse, repo transactions, interest rate derivatives, Forward
Rate Agreements and SWAPS (BB, 2010, pp16).
Rating Category Mapping :
To make uniformity in calculating the Risk Weightage in % and calculation of CAR between the
Bangladesh Bank‟s Rating grade and Rating notches of various DCRAs, Bangladesh Bank has
mapped between those categories, both in Long Term and Short Term, as follows:
Long Term Rating Category Mapping
BB’s
Ratin
g
Grade
Equivalent
Notch/Notatio
n of CRISL
Equivalent
Notch/Notatio
n of CRAB
Equivalent
Notch/Notatio
n of NCRL
Equivalent
Notch/Notatio
n of ECRL
Equivalent
Notch/Notatio
n ofACRSL
Equivalent
Notch/Notatio
n of ACRL
Equivalent
Notch/Notatio
n of WASO
Risk
Weigh
t (%)
1
AAA AAA AAA AAA AAA AAA AAA
20
AA+, AA, AA- AA1, AA2, AA3 AA+, AA, AA- AA+, AA, AA- AA+, AA, AA- AA+, AA, AA- AA1, AA2, AA3
2 A+, A, A- A1, A2, A3 A+, A, A- A+, A, A-, A+, A, A-, A+, A, A-, A1, A2, A3 50
3 BBB+, BBB,
BBB-
BBB1, BBB2,
BBB3
BBB+, BBB,
BBB-
BBB+, BBB,
BBB-
BBB+, BBB,
BBB-
BBB+, BBB,
BBB-
BBB1, BBB2,
BBB3 100
4 BB+,BB, BB- BB1, BB2, BB3, BB+, BB, BB- BB+, BB, BB- BB+, BB, BB- BB+, BB, BB- BB1, BB2, BB3
5
B+, B, B-,
CCC+, CCC,
CCC-,
CC+, CC, CC-
B1, B2, B3,
CCC1, CCC2,
CCC3,
CC
B+, B, B- B+, B, B- B+, B, B-
CC+,CC,CC-
B+, B, B-, CCC B1, B2, B3,
CCC
150
6 C+, C, C-, D C, D C+, C, C-, D C, D C+, C, C-, D CC+,CC,CC-,
C+, C, C-, D
CC1, CC2, CC3,
C+, C, C-, D
Short Term Rating Category Mapping
BB’s
Ratin
g
Grade
Equivalent
Notch/Notatio
n of CRISL
Equivalent
Notch/Notatio
n of CRAB
Equivalent
Notch/Notatio
n of NCRL
Equivalent
Notch/Notatio
n of ECRL
Equivalent
Notch/Notatio
n ofACRSL
Equivalent
Notch/Notatio
n of ACRL
Equivalent
Notch/Notatio
n of WASO
Risk
Weigh
t (%)
S1 ST-1 ST-1 N1 ECRL-1 ST-1 AR-1 P-1 20
S2 ST-2 ST-2 N2 ECRL-2 ST-2 AR-2 P-2
50
S3 ST-3 ST-3 N3 ECRL-3 ST-3 AR-3 P-3
S4 ST-4 ST-4 N4 ECRL-4 ST-4 AR-4 P-4 100
S5 ST-5 ST-5 N5 ECRL-5 ST-5 AR-5 P-5
150
S6 ST-6 ST-6 - ECRL-6 ST-6 AR-6 P-6
Domestic Credit Rating – Operation and Effectiveness in Bangladesh | 23
Score & Weight Mapping of BB rating grade with SME Rating
Exposure Type BB Rating Grade Risk Weight
(%)
SME 1 20
SME 2 40
SME 3 60
SME 4 80
SME 5 120
SME 6 150
Unrated (small enterprise &<BDT 3.00m) 75
Unrated (small enterprise having ≥ BDT
3.00m & Medium enterprise) 100
Capital Adequacy Ratio (CAR):
To be more risk sensitive and shock resilient against credit, market and operational risk, the
depository institutions are asked by the Bangladesh Bank to maintain some minimum Capital against
its assets. Bangladesh Bank put on guidelines on how to calculate the banks‟ Capital Adequacy Ratio
(CAR).
In order to calculate CAR, banks are required to calculate their Risk Weighted Assets (RWA) on the
basis of credit, market, and operational risks. Total RWA will be determined by multiplying the
amount of capital charge for market risk and operational risk by the reciprocal of the minimum CAR
and adding the resulting figures to the sum of risk weighted assets for credit risk. The CAR is then
calculated by taking eligible regulatory capital as numerator and total RWA as denominator (BB,
2012, pp 12). The Minimum Capital Requirement (MCR) is 10% of the total RWA. Thus The Capital
Adequacy Ratio is calculated by the following formula:
Risk Based Capital Adequacy:
Bangladesh Bank did not make any certain amount of Capital target. A bank should weight its assets
according to its risk exposure and thus maintain sufficient capital to protect itself through any shock.
The assets should be weighted with risk factors and calculate Total Risk Weighted Asset (RWA).
Banks are to calculate Risk Weighted Asset (RWA) on the basis of risk weight mapping circulated by
BB against the credit rating assessment made by listed External Credit Rating Agencies (ECAI)
Domestic Credit Rating – Operation and Effectiveness in Bangladesh | 24
Risk Weighted Assets (RWA):
Risk must be taken into consideration while calculating the capital needed to meet BB requirements.
BB provides a list of assets and necessary weights based on their respective risk. The basic RWA
calculation (BBL, 2011) is as below:
Example: If a Bank finance a company BDT 35.00 million which is secured by the company‟s fixed
assets, and obtains a credit rating grade of A will have a RWA of BDT 17.50 million
Basel III :
Bangladesh Bank through BRPD circular no. 7 dated March 31, 2014 introduced Basel III in
Bangladesh. The circular stated that Basel III reforms strengthen the Bank level i.e. micro-prudential
regulation, with the intention to raise the resilience of individual Banking Institutions in period of
stress. Besides the reform have macro prudential focus also, addressing system wide risks, which
can build up across the banking sector. These new global regulatory and supervisory standards
mainly addressed thefollowing areas:
I. Raise the quality and level of capital to ensure banks are better able to absorb losses on both
as going concern and as gone concern basis II. Increase the risk coverage of the capital framework
III. Introduce leverage ratio to serve as a backstop to the risk-based capital measure IV. Raise the standards for the supervisory review process (pillar 2) and V. Public disclosures (pillar 3) etc.
Bangladesh Bank published a roadmap that will be followed by all the financial institutions from
2015 and Basel III will be fully implemented in 2020.
Calculation of RWA for Rated Company:
BDT 35.00 million x RW mapping against A= BDT ? million
BDT 35.00 million x 50% = BDT 17.50 million
Therefore, the Provisioning of Capital is 10% of RWA = RWA x 10%
= BDT 17.50 million x 10%
= BDT 1.75 million
Calculation of RWA for Un-Rated Company:
BDT 35.00 million x RW = BDT ? million
BDT 35.00 million x 125% = BDT 43.75 million
Therefore, the Provisioning of Capital is 10% of RWA
= RWA x 10%
= BDT 43.75 million x 10%
= BDT 4.37 million
Additional capital that can be lend by BANK is BDT 2.63 million (4.37-1.75) million
Domestic Credit Rating – Operation and Effectiveness in Bangladesh | 25
Roadmap for Basel III prescribed by Banking Regulation & Policy Department
Action Deadline
Issuance of Guidelines on Risk Based Capital Adequacy December 2014
Commencement of Basel III Implementation process January 2015
Capacity Building of bank and BB officials January 2015- December 2019
Initiation of Full Implementation of Basel III Deadline January 2020Action
Changes after implementation of Basel III :
Previously Capital Adequacy Ratio in Basel II will be termed as Capital to Risk-weighted Asset
Ratio(CRAR), and be calculated as shown below as guidelines of Basel III:
To calculate Capital to Risk-weighted Asset Ratio (CRAR), banks are required to calculate their Risk
Weighted Assets (RWA) on the basis of credit, market, and operational risks. Total RWA will be
determined by multiplying the amount of capital charge for market risk and operational risk by the
reciprocal of the minimum CRAR and adding the resulting figures to the sum of risk weighted assets
for credit risk. This guideline is applicable to all scheduled banks either on Solo or Consolidated13
basis.
Economic Rationale of Credit Rating :
Credit ratings, while they can be a potentially positive part of the financial industry, can also have a
negative effect on the economic policy of countries. Along with rating of different corporate houses,
both government and non-government organizations, country credit ratings is also carried out,
which have had its share of impact.
For countries that take out loans or to buy sovereign bonds,a rating downgrade has negative effects
on their access to credit and the cost of their borrowing. This could potentially force a government
to have to borrow money at a higher interest rate and thus scale down its plans for economic
developmentEkhoury[2008].
While rating agencies can have an effect on individual countries, they can also affect the global
economic system at large as can be seen by their actions in the current global financial crisis.
13
‘Solo Basis’ - refers to all position of the bank and its local and overseas branches/offices
‘Consolidated Basis’ - refers to all position of the bank (including its local and overseas branches/offices) and its subsidiary company/companies engaged in financial (excluding insurance)activities like merchant banks, brokerage firms, discount houses, etc (if any)
Domestic Credit Rating – Operation and Effectiveness in Bangladesh | 26
On a macro level, while rating a financial institution, both banking and NBFI, it‟s credit
rating grade impacts not only the bank itself but also several thousand stakeholders who are
associated. Similarly credit rating grade provided to an institutional business also ripples the effect
far wider into the economy than that witnessed a decade ago. The following table denotes the
economic rationale of credit rating to various stakeholders.
Factors Bank
Financial
Institutions Insurance Client
Foreign
Investors
Country
As a
Whole
Safeguards against bankruptcy √ √ √ √
Recognition of risk √ √ √ √ √ √
Wider access of Loan for
Borrowers
√ √ √ √
Lower cost of borrowing √ √ √ √ √ √
Improved confidence of
Lenders
√ √ √ √ √
Improved loan sanctioning
capacity of lenders
√ √ √ √
Reflection of institutional image √ √ √ √ √
Job creation and skill
enhancement
√
International demand √
Export and International
Financing
√ √ √
BASEL II Compliance √ √
Domestic Credit Rating – Operation and Effectiveness in Bangladesh | 27
Best Practices in Credit Rating Industry :
Best Practices recommended by ADB :
In December 2008 ADB published “Handbook on International Best Practices in Credit Rating”. In
that book ADB differentiated best practices in two parts: (i) Essential Best Practices and (ii)
Desirable Best Practices. These are explained below
Essential Best Practice
1. Pre rating requirements. Before commencing the rating process the DCRA must sign a
written agreement with the obligor requisitioning a credit rating assignment and under no
circumstances shall promise implicitly or explicitly rating outcome. The organizational
structure and rating process should ensure that rating decisions are not influenced by rating
fees received by the DCRAs.
2. Rating definitions and recognition of Default. A missed payment on a debt obligation on due
date or after pre-specified grace period should constitute as default. Filing for bankruptcy
and involuntary loan rescheduling should also construe as default.
3. Policies and processes for ratings. A DCRAs should have well-defined and updated credit
rating criteria, which are publicly available and consistently applied. Formal rating
committees should have the sole authority to assign ratings. All rating actions should be
announced promptly, and a list of all outstanding ratings should be freely availableon the
DCRA‟s Web site. Every rating should be kept under surveillanceuntil it is withdrawn.
4. Confidentiality requirements. All information submitted by a rated entity or an issuer in
connection with a credit rating assignment is presumed confidential and should be kept so at
all times. Members of the Boardof Directors should not have access to such confidential
informationsubmitted by the rated entity, unless as a part of the rating committee.
5. Independence and avoidance of conflicts of interest. A DCRAs should not refrain from taking
a rating action because of the potential effect of the action on the DCRAs, issuer, investor, or
other market participant. Rules regarding avoidance of conflicts of interest, maintaining
neutrality of analysts, and preventing employees from making gains by misuse of confidential
information are also included.
6. Private ratings. Issuers may seek private credit assessments of their businesses, and a
DCRAs should, in such cases, maintain complete confidentiality of its ratings.
7. Unsolicited ratings. A DCRAs should publicly state its stance on assigning unsolicited ratings.
Where it chooses to assign unsolicited ratings, a DCRAs should distinguish unsolicited ratings
from mandated ratings using a notation in the rating symbol.
8. Unaccepted ratings. A DCRAs should have a published policy regarding disclosures on
unaccepted ratings, where the rated entity has not accepted the initial rating assigned to its
debt issuance.
9. Process audit. A DCRAs should set up audit checkpoints to ensure that the adopted best
practices, policies, and procedures in acquiring, executing, communicating, and surveillance
of ratings are implemented.
Desirable Best Practice
1. Computation of default statistics. Every rating agency should publish, at least annually, a
default and transition study, along with the methodology used for calculating default rates.
Domestic Credit Rating – Operation and Effectiveness in Bangladesh | 28
2. Dedicated advanced functional group.It is recommended that a DCRA have
dedicated functional groups for industry focus, quality assurance, and library and data
management.
3. Use of rating enhancers and early warning indicators.It isrecommended that a DCRA provide
some indication, such as a ratingoutlook, of the possible movement of the assigned rating.
4. Market feedback before major changes.A DCRA should seek feedback from market
participants whenever it contemplates major changes in its rating criteria or key rating
policies, and apprise market participants of these changes.
Best Practices advocated by ACRAA :
Association of Credit Rating Agencies in Asia (ACRAA) was formed on 14th September 2001 at the
Asian Development Bank Headquarters Metro Manila, by 15 Asian credit rating agencies from 10
countries. It was formed with the following objectives14
To develop and maintain cooperative efforts that promote interaction and exchange of ideas,
experiences, information, knowledge and skills among credit rating agencies in Asia and that
would enhance their capabilities and their role of providing reliable market information.
To undertake activities aimed at promoting the adoption of best practices and common
standards that ensure high quality and comparability of credit ratings throughout the region,
following the highest norms of ethics and professional conduct.
To undertake activities aimed at promoting the development of Asia's bond markets and
cross-border investment throughout the region.
Keeping these objectives in mind ACRAA has designed a detailed checklist which member credit
rating agencies can full fill in order to understand what are the best practices of credit rating
companies in Asia and how far behind are they from that practice. ACRAA now has around 31 Rating
agencies in 14Countries in Asia as member. ACRAA is also in the process of attaching with other
similar association in the World like Europe and Latin America.
Best Practices advocated by International Organization of Securities Commissions
(IOSCO) :
Published in September 2003, International Organization of Securities Commissions, IOSCO‟s
Technical Committee issued a statement of principles regarding the Activity of CRA‟s. These Codes
would help reduce the asymmetry of information and avoid any conflicts of interest or a lack of
independence that would undermine the overall investor‟s confidence in the transparency and
integrity of the Credit Rating Report. Events of misunderstanding of Credit Rating process by
investors, minimal oversight and formal regulation and concerns over the integrity of Credit Rating
process have encouraged IOSCO to develop such guideline of principles
The principles were set upon discussion among IOSCO members, CRA‟s, Representatives of BASEL
Committee on Banking Supervision, International Association of Insurance Supervisors, Issuers and
the public at large. The Code Fundamentals are broken into four sections:
14
Objectives and ACRRA descriptions are taken from its official website” http://acraa.com/final.asp”
Domestic Credit Rating – Operation and Effectiveness in Bangladesh | 29
1. The Quality and Integrity of the Rating Process;
a) Quality of the Rating Process
b) Monitoring and Updating
c) Integrity of the Rating Process
2. CRA Independence and the Avoidance of Conflicts of Interest; and,
a) General
b) CRA Procedures and Policies
c) CRA Analyst and Employee Independence
3. CRA Responsibilities to the Investing Public and Issuers.
a) Transparency and Timeliness of Ratings Disclosure
b) The Treatment of Confidential Information
4. Disclosure of Code of Conduct and Communication with Market Participants
Apart from ACRAA, BSEC also advised DCRAs to follow this ISOCO Codes. Performance of DCRAsof Bangladesh regarding best practice of compliance :
ACRAA website denotes that only four DCRA, CRISL, CRAB, ECRL & NCRL are members of ACRAA.
The remaining four companies WASO, ARGUS, ALPHA and BDRAL are yet to opt for ACRAA
membership, means they are still outside the scope of following some best practices in their
operations. ECRL, CRAB and CRISL at this stage broadly comply with ADB Handbook.
Tsunoda[2013] explains that Bangladeshi DCRAs faces difficulty in running its operation as the paid
up capital required for Bangladesh DCRAs to get a license is only BDT 5 million, which is very little to
the comparison to its operation. The paid up capital was decided in 1996 when there was little or no
market for credit rating and only one company was operating. But as more licenses are being issued
the DCRAs are facing fierce competition which puts their survivability in question. If a DCRAs cannot
survive in long term then the quality of its services shall also deteriorate.
Lack of accounting transparency makes it even very difficult for Bangladeshi DCRAs to function
properly. Tsunoda[2013] elaborates the problem with a detailed example “Suppose the audited
financials reveal that a client has never earned any profit during the last 10 years and capital is in
the negative. Here the analyst in charge of the assessment needs to raise a flag on how and under
what circumstances the client was able to pay all its loan installments in a timely fashion without a
single instance of default. Such dichotomies need to be identified, highlighted, and investigated
before a rating report is released.”
Emergence of ACRAB :
Due to the problems mentioned before the DCRAs operating in Bangladesh were facing severe
problems as the price of performing rating assignments were drastically falling because of intense
competition after emergence of new 3-4 rating agencies within very short time after giving 2
licenses in 2009 (total became 8). As mentioned in the earlier sections lack of accounting
transparency already makes the job of DCRA quite difficult and doing it at a discounted fee almost
made it impossible. To counter this problem on 1st April 2014 the DCRAs operating in Bangladesh
formed an association called ACRAB (Association of Credit Rating Agencies in Bangladesh) with the
objective of providing a stable market condition in respect of rating quality and fee which are linked
Domestic Credit Rating – Operation and Effectiveness in Bangladesh | 30
to each other. Additionally to increase the collective bargaining power by the DCRAs, both
the regulators (BSEC & BB) suggested to form this association. After taking consent from all the
members a minimum rating fee chart was drawn (considering market perception on fee and market
demand) to follow strictly by all the members. Failure to follow this chart will result in high penalty;
this has bought some stability in the market and has provided the DCRAsto offer quality services in
level playing field. Current Members of ACRAB are listed below
I. Credit Rating Information and Services Ltd.(CRISL) II. Credit Rating Association of Bangladesh Ltd.(CRAB)
III. Emerging Credit Rating Ltd.(ECRL) IV. National Credit Rating Ltd. (NCRL) V. Alpha Credit Rating Ltd. (ALPHA)
VI. WASO Credit Rating Company (BD) Ltd. (WASO) VII. Argus Credit Rating Services Ltd. (ARGUS)
The Bangladesh Rating Agency Limited (BDRAL) opted for not joining the ACRAB because of
differential licensing scope (only SME Rating).
Credit Rating vs. Auditing :
Although there are some similarities but there are also quite substantial differences between these
two professions are summarized as follows:
AREA CREDIT RATING AUDIT
Regulators
in Bangladesh
1. Bangladesh Securities and Exchange
Commission (BSEC) 2. Bangladesh Bank (BB)
3. Insurance Development & Regulatory Authority Bangladesh (IDRA)
4. Association of Credit Rating Agencies
in Bangladesh (ACRAB)
1. The Institute of Chartered Accountants
of Bangladesh (ICAB) 2. Ministry of Commerce (MOC)
Definition Evaluation of the
timely repayment ability of a firm or debt security (such as a security).
Credit rating is built up on the basis of - credit history,
- present financial position, and - likely future income.
- different credit rating agencies uses
different kinds of methodologies. - typically, ratings are expressed
as letter grades that range, for example, from „AAA‟ to „D‟ to communicate the
agency‟s opinion of relative level of
credit risk.
Periodic or specific purpose (ad
hoc) audit conducted by external (independent) certified accountants.
Its objective is to determine, among other things, whether
- accounting records are accurate and complete,
- prepared in accordance with
the provisions of GAAP and BAS, and - statements prepared from
the accounts present fairly the organization's financial position, and
the results of its financial operations.
Time frame The assignment of credit rating is a
continuous process. Upon assigning a final credit rating grade to the firm or security,
the CRA can re-assess the grade anytime it seems fit, i.e. when certain
The assignment of audit is a reflection of a
certain period of time which has already passed. With the conclusion of that period, the audit
examines the financial statement of the entity and states whether the true position of the
Domestic Credit Rating – Operation and Effectiveness in Bangladesh | 31
circumstances does not reflect the assigned grade.
company is reflected within the financial statement. Upon conclusion of the audit
process, usually the audit firm cannot revoke its opinion.
Work Process
Information Generally credit rating opinion is based on
information from various sources. It can
come from management of the company, competitior, government, supplier,
industry news etc.
Majority of the information is provided by the
management of the company which is then
reviewed by the auditor.
Benefits Credit ratings may facilitate the process of
issuing and purchasing bonds and other debt issues by providing an efficient,
widely recognized, and long-standing measure of relative credit risk. Investors
and other market participants may use the
ratings as a screening device to match the relative credit risk of an issuer or
individual debt issue with their own risk tolerance or credit risk guidelines in
making investment and business decisions.
A rigorous audit process will, almost
invariably, also identify insights about some areas where management may improve their
controls or processes. In certain circumstances the auditor may be required to communicate
control deficiencies to management and those
charged with governance. These communications add value to the company and
enhance the overall quality of business processes.
Limitations Since there are future events and developments that cannot be foreseen,
the assignment of credit ratings is not
anexact science.
For this reason, credit rating opinions are not intended as guarantees of credit
quality or as exact measures of the
probability that a particular issuer or particular debt issue will default.
Instead, ratings express relative opinions
An opinion is not a guarantee of an outcome, but rather a statement of professional
judgment. The auditor cannot obtain absolute
assurance that financial statements are free from material misstatement because of the
inherent limitations of an audit. These are caused by a number of factors. For example,
many financial statement items involve
subjective decisions or a degree of uncertainty (e.g., accounting estimates).
Consequently, such items are subject to an
Domestic Credit Rating – Operation and Effectiveness in Bangladesh | 32
about the creditworthiness of an issuer or credit quality of an individual debt issue,
from strongest to weakest, within a universe of credit risk.
inherent level of uncertainty which cannot be eliminated by the application of auditing
procedures.
It should not be assumed that every single fact
and detail in a set of audited financial statements has been checked and verified by
the auditors, and is therefore guaranteed to be 100 percent accurate. The auditor obtains
reasonable assurance by gathering evidence
through selective testing of financial records.
Criticisms of Credit Rating Agencies :
Credit Rating Agencies were widely criticized during global financial crisis of 2007-2008. It was
claimed by many that the credit rating agencies assigned inflated grades to issuers. The fact that
issuer pays the credit rating fee instead of the investor was the primary driver of criticism. Ryan
[2012] added four more criticisms to the list
1. Lack of Competition: International credit rating market is dominated by 3 CRAs(S&P,
Moody‟s and The Fitch), as they rates all major debts, there is not much competition among
the firms.
2. Lack of Accountability: It has been criticized that even though CRAs are considered as an
important gatekeeper of the financial industry, the ratings it assigns are based on fixed
documented standards and agencies themselves agree that its evaluations are basically
opinions which cannot be verified on court.
3. Lack of Timeliness and Pro-cyclical Behavior: It has been criticized that the credit
rating agencies do not issue warnings on timely manner, for example US congressional
report published on 13 April 2011 stated “Emails in 2006 and early 2007 show employees
were aware of housing market troubles, well before the massive downgrades in July 2007.”15
If the CRA had heed its own warning then it would have issued a more conservative grades.
4. Rating Triggers: Since a CRA may downgrade any entity any time, this creates a big
problem. Because downgrading the company will decrease its credit worthiness and increase
its financial cost causing it to fall in an acute liquidity crisis. So in other words CRA itself
might trigger financial crisis.
In reply to this criticism Douglas L Peterson, President of S&P stated that “We have taken significant
actions to further strengthen our independence from issuer influence. We have long had policies to
manage potential conflicts of interest such as a separation of analytic and commercial activities, a
ban on analysts from participating in fee negotiations, and de-linking analyst compensation from the
volume of securities they rate or the type of ratings they assign. After the crisis, we decided to
strengthen analytical independence by rotating the analysts assigned to a particular issuer and
enhancing analyst training. We also improved the integrity and validity of our methodologies and
models: We reassessed the principles underlying the way we rate all debt and changed the way we
rate almost every type of security that was affected by the financial crisis. For mortgage-related
15“Credit raters triggered financial crisis: panel”, Reuters, April 2014
Domestic Credit Rating – Operation and Effectiveness in Bangladesh | 33
securities, for example, we significantly increased the credit enhancement required to
achieve a 'AAA' rating and made it more difficult for securities to achieve high ratings.”16
Current Scenario in Bangladesh :
Although the concept of credit rating emerged in early twentieth century in the financial market of
USA, it is still new in the developing countries like Bangladesh. Long after a century of its
emergence, Bangladesh Securities and Exchange Commission (BSEC)promulgated rules regarding
the operation of rating agencies in 1996. No rating agency was licensed in the country till 2002,
hence no rating was published. It was South-East Bank Limited to be ratedfor the first time in
Bangladesh which was carried out by the credit rating agency CRISL, in November 2002. After that
delayed initiation, hundreds of institutions and few bonds are rated each year. ECRL, CRISL, CRAB,
NCRL, ALPH, WASO and ARGUS are licensed credit rating agency of the country permitted to rate
the entity and debt instruments under the Credit Rating Companies Rules 1996. BDRAL are licensed
under the same act by BSEC but only to rate the SME sector.
1. Little or less monitoring by Regulators
Along with Bangladesh Securities and Exchange Commission (BSEC), Bangladesh Bank, Insurance
Development & Regulatory Authority Bangladesh (IDRA) is responsible to monitor the regular
operation of each listed credit rating agency (CRA). However, recent scandals in the financial sector
suggest that a more rigid approach towards the screening of various segments of financial sector is
required. In order to develop an mechanism of self-scrutiny, Association of Credit Rating Agencies in
Bangladesh (ACRAB) was formed in April 2014 by the recommendation of Bangladesh Securities and
Exchange Commission and Bangladesh Bank.
2. Banks are most benefited from credit rating
Since Basel II is directly addressed to financial institutions (FI), it‟s guidelines help assist FI‟s
calculate its risk asset base and eventually maintain a cautious lending and deposit ratio. Hence the
benefits of credit rating of financial institute and its clients are more visible to the FI compared to
that of client. For the borrowing client, credit rating report is merely a complain requirement which is
to be fulfilled prior to loan sectioning or registering for IPO. This therefore has discouraged various
corporate clients to do rating.
3. Information keeping of local organizations in some cases is very poor
Since modernization and the use of accounting law and guidelines were neglected by previous
generation owners, the visibility of revenue and expenses was reluctant. Imposition of banking and
various association rules to some extend have tutored local businesses to maintain a certain set of
paperwork which needs to be further refined to help the flow of information and its visibility.
4. Clients are reluctant to provide sufficient information
Risk of data theft and confidentiality of information, clients are often reluctant to provide
information. Along with Credit Rating Agency‟s it is also the responsibility of a banker to educate the
16
“The Role of Credit Ratings in The Financial System”, May 2012
Domestic Credit Rating – Operation and Effectiveness in Bangladesh | 34
client in this event. Every credit rating agreement holds a confidentiality clause which the
CRA‟s abide by to safeguard the confidentiality of information received from the respective client.
5. Payment of Fees by the Clients
Clients are still not very positive to pay the Rating Fee termed as high. Charging higher fee 5 years
back is still in their mindset. Practically the fee charged by the DCRAs are now a days 1/5 of the free
changed in 2004. The minimum rating fee in our Neighboring country India is Rs. 100,000 against
even Taka 10,000 in Bangladesh. Because of the competition amongst 8 rating companies and
larger number of client base the fee is now extremely low. It has to be understood that to provide
required quality services DCRAs need to maintain quality staff and training and thus always pressure
on cost. All the new DCRAs are still struggling on achieving Cash Break-even after 4-5 years of
obtaining licenses.
Summary and Recommendations :
The paper explained concept of credit rating, how it is being implemented over the world and the
evaluation practices followed by DCRA of Bangladesh compared to the best practices. The paper
also mentioned the difficulties faced DCRA operating in Bangladesh. One of the major problems
faced by DCRA operating in Bangladesh is intense competition. United States of America a country
with GDP of $16.722 trillion (2013) has 10 nationally recognized credit rating organizations 17
whereas Bangladesh with a GDP of $161.76 billion has 8 nationally recognized credit rating
agencies. Even though BSEC has the regulations for credit rating in 1996, credit rating is still fairly a
new concept and many finance profession still does not understand credit rating properly. On
positive note implementations of Basel II in the banking industry of Bangladesh has familiarized the
bankers with credit rating and over last five years majority of the Banks have made credit rating
mandatory for their clients in order to meet its capital adequacy requirements.
Recommendations:
1. Effective Monitoring from the Regulators: Regulators are required to monitor DCRAs of
Bangladesh more effectively, so that there is less malpractice and DCRAs who are breaking
the rules and regulations are penalize. This will encourage the DCRAs to provide high quality
service to its clients. BSEC initiated to prepare one Manual on visiting the Credit Rating
Companies to ensure quality and responsibility which is yet to be introduced.
2. Banks Should Offer Benefits To its Clients: All financial institutions should offer some
benefits to its clients such as a declined interest rate so that more and more clients are
encouraged to obtain a credit rating report. As mentioned above clients in most of the time
not interested to provide information which leads to a bad grade if the banks offer lower
interest rates than the clients will be encouraged to provide more information which may
lead to a better grade which will be mutually beneficial to the client and the bank.
17
A credit rating agency may apply to the United States Securities and Exchange Commission for registration as a nationally recognized statistical rating organization ("NRSRO"). The SEC's Office of Credit Ratings administers the SEC's rules relating to NRSROs
Domestic Credit Rating – Operation and Effectiveness in Bangladesh | 35
3. Default Rating Calculation:Because of completion of span of 4-5 years of rating
operations by most of the DCRAs in Bangladesh, regulator should insists DCRAs to calculate
default Rating Chart on all its future ratings.
4. Introduce Co-Rating and/or Rotation:Like Audit of large banks, corporations and big
business houses, regulators might make the rules of Co-rating for maintaining and ensuring
the quality of rating. Regulator should also consider for rating rotation after each 4 years
amongst the rating companies. This will definitely ensure the high quality service to its
clients.
5. Engage DCRAs in Sovereign Rating: DCRAs are now quite capable of taking
responsibility of conducting the Sovereign (Country) rating of Bangladesh along with the
International rating organizations, Moody‟s, S&P and The Fitch. Currently 1 or 2 local
multinational banks are providing those services to all those International rating agencies.
6. Arrange Workshops and Seminars: The DCRAs operating in Bangladesh should
undertake more active role to educate the finance professionals of the country. The
importance and benefits of credit rating needs to be clearly communicated to all the
stakeholders. ECRL one of the credit rating agencies operating in Bangladesh has already
started working towards this endeavor. It has held multiple seminars to promote credit
rating.
Domestic Credit Rating – Operation and Effectiveness in Bangladesh | 36
Emerging Credit Rating Ltd. – A Brief Profile
Emerging Credit Rating Limited (hereinafter referred to as ECRL) began its journey in the year 2009 with the motive to deliver credible superior & quality credit rating opinion in various industry segments around the nation. ECRL is licensed credit rating agency from the Bangladesh Securities Exchange Commission (BSEC) and obtained Bangladesh Bank Recognition as an External Credit Assessment Institution (ECAI). ECRL has technical collaboration with Malaysian Rating Corporation Berhad (MARC), which was previously collaborated with The Fitch Rating of USA. ECRL‟s drive to deliver the promised quality has helped ECRL to complete 3,500 rating assignments(approx.) from the time of inception to April 25, 2015.
ECRL‟s team is oriented towards the continuous improvement of processes, striving for an important role in the leadership of the business world. ECRL is committed to provide top most ingenious Credit Rating and Comprehensive Research Services in Bangladesh through a driven work force of 60 individuals. ECRL‟s environment and work practice not only helps the company thrive but also develops the employees within, making them suitable and efficient for structured corporate houses around the country.
ECRL‟s ratings services and solutions reflects independency, professional, transparency and impartial opinions, which assist businesses enhance the quality of their decisions and help issuers access a broader investor base and even smaller known companies approach the money and capital markets. The Credit Rating process is an informed, well-researched and intended opinion of rating agencies on the creditworthiness of issuers or issues in terms of their/ its ability and willingness of discharging its financial obligations in timely manner. Issuers, lenders, fixed-income investors use these risk assessments for the purpose of lending to or investment in a corporation (such as a financial institution, an insurance company, a non-banking corporation or a corporate entity) as well as evaluating the risk of default of an organization‟s financial obligations in terms of loan or debt.
ECRL‟s existence and foundation is built on the significance that is placed in investors and depositors, their protectionism, and the assurance to provide clarity and reliability in rating judgment, through globally accepted rating methodologies and processes.
ECRL aims to reach the premier position of a credible and acceptable rating business entity in Bangladesh via the process of making sure that Emerging Credit Rating Ltd is recognized by investors, issuers and bankers for its transparent and timely coverage and reliability, allowing financial decision-makers to feel confident about their resolutions.
Domestic Credit Rating – Operation and Effectiveness in Bangladesh | 37
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