1. WHY IS CREDIT RATING NECESSARY AT ALL?
Credit rating is an opinion expressed by an independent professional organisation, after making a detailed study of all relevant factors. Such an opinion will be of great assistance to investors in making investment decisions. It also helps the issuers of debt instruments to price their issues correctly and to reach out to new investors. Regulators like Bangladesh Bank and Bangladesh Securities & Exchange Commission often use credit rating to determine eligibility criteria for some instruments. Credit ratings are also used for determination of risk weights for calculation of Capital Adequacy for Banks as per Basel 3 guidelines. In general, credit rating is expected to bridge information asymmetry in the market and establish, over a period of time, a more meaningful relationship between the quality of debt and the yield from it. Credit Rating is also a valuable input in establishing business relationships of various types.
2. WHAT IS THE IMPACT OF BASEL 3 ON BANKS IN BANGLADESH?
Under the Basel 3 framework, banks will need to provide capital for credit risk based on the risk associated with their loan portfolios. If a bank has high-quality credit exposures (for example, if the majority of its credit exposures are in the ‘AAA’ and ‘AA’ categories) it will save capital on account of credit risk. Conversely, a bank with relatively lower rated credit exposures will need to provide more capital. Additionally, banks will have to provide incremental capital for market risk and operational risk.
3. IS CREDIT RATING MANDATORY UNDER BASEL 3 FOR ALL BANK CLIENTS/EXPOSURES GIVEN BY BANKS?
Credit rating is not mandatory under Basel 3. However, banks are likely to be able to save capital if they get their counterparties/loan portfolios rated. If a bank chooses to keep some of its clients/loans unrated, it may have to provide a risk weight of 125 per cent for credit risk on such loans. On the other hand, by getting clients/exposures rated, a bank can save capital on loans in the higher rating categories. CRAB expects pricing of fresh loans to be strongly correlated with the credit ratings that such loans carry. Higher-rated companies in particular will benefit from this.
4. SHOULD AGREEMENTS BE MADE WITH BANKS OR ITS CLIENT?
The Rating agreement must be made between Bank’s Client and Credit Rating Agency. The rating must be solicited by a client for its use by Bank for capital adequacy calculation purpose. Banks may request their clients for rating.
5. WHICH TYPES OF COMPANIES/ FACILITES WILL BE RATED BY CRAB?
CRAB will rate all types of companies and loans & working capital facilities of banks. The loan/line of credit ratings include project loans, corporate loans, general purpose loan, working capital demand loans, cash credit facilities, and non-fund-based facilities like letters of credit and bank guarantees.
6. HOW LONG WILL CRAB TAKE TO RATE AN ENTITY OR INSTRUMENT?
From the day it receives a written request for a entity or instrument rating, along with all information required for the analysis, CRAB will take two to three weeks to complete the exercise.
7. WILL CRAB RATE EVERY ENTITY OF A GROUP SEPARATELY?
CRAB will assign individual ratings to each entity of a group in case of entity rating. In case of bank loan rating or facility rating, the rating I will also be for individual facility.
8. WHAT INFORMATION ARE REQUIRED FROM CLIENT FOR RATING? WHAT ABOUT THE CONFIDENTIALITY OF THESE INFORMATION?
CRAB would require information relating to financial position (balance sheet, income statement etc,) operations, management, owners, sister concerns, banking relations, suppliers & buyers, machinery, market, competition, etc. The information collected from clients will be kept confidential and will be used only for rating. The full rating report will be given to client. A brief rating rationale highlighting the determinants of the rating will be published.
9. HOW LONG WILL A RATING BE VALID?
Initial rating of a company (entity) will usually be valid for one year.
10. WHO WILL PAY FOR THE RATINGS?
Rating requests are usually made by the borrower/client. The client /borrower will pay the rating fee. CRAB will require the borrower/client to sign a rating agreement before the rating exercise is initiated.
11. WHO RATES THE RATING COMPANIES?
Informed public opinion will be the touchstone on which the rating companies have to be assessed and the success of a rating agency should be measured by the quality of the services offered, consistency and integrity.