Ratings are the opinion of rating agencies on the creditworthiness of issuers or issues in terms of their/ its ability and willingness of discharging its obligations in timely manner. Ratings are issued on the basis of information supplied to CRISL by the issuer or its officials and also on the basis of information CRISL believes to be reliable.
Rating does not constitute any advice for investment nor is it a recommendation to purchase, hold or sell a particular security. CRISL ratings opinions are not construed as comment on the suitability of investment for a particular investor. CRISL ratings are not investment recommendations and CRISL does not provide any investment advisory services.
CRISL is not obligated to perform any due diligence on independent verification of any information submitted to it or obtained in the process of rating or surveillance. CRISL does not perform an audit and also does not undertake any responsibility of the verification of the audited statements. The assignment of rating to an issuer or an issue by CRISL should not be viewed as guarantee of the accuracy, completeness and timeliness.
CRISL expresses its opinions in terms of some alphabets such as AAA, AA, B, C etc which in short indicates the investment grade, speculative grade, risk grade or default grade etc. The definition of CRISL ratings are available in the rating scales
CRISL investment grades ratings cover AAA down to BBB, while Speculative grades covers BB down to B. Its Risky Grades fall under the range from CCC to C while D is considered as the Default Grade.
CRISL offers Long Term and Short Term ratings to indicate the time horizon of ratings. Its long term Rating covers a period of one year while its short term rating covers a period up to six months.
CRISL ratings are in local currency and therefore, it does not take into consideration the sovereign risks and foreign currency risk of Bangladesh Government. CRISL, being a domestic rating agency of Bangladesh considers the government of Bangladesh as the highest pay master and all government guaranteed securities/ guarantees are considered as AAA.
CRISL adopted the international definition of default as adopted by global rating agencies. Under the above definition, Default is:
A) A missed installment (Principal and or Interest) which has not been discharged / paid as per schedule or within the grace period allowed by the regulators/ creditors;
B) Failure to honour the corporate guarantee obligations as per contract or within the allowed grace period;
C) The legal insolvency or bankruptcy of the issuer/ entity;
D) A distress exchange in which the bondholders/ creditors are offered a substitute instrument with inferior terms and conditions;
E) Restructuring of a financial obligation substantially disadvantageous to the creditors;
The rating service can be used by the following entities:
Rating Agencies are playing very important role in the investment gamut of a country. The report and analysis of the rating agencies are believed to be reliable and therefore trusted by all. Now the million dollar question whether the rating agencies are doing their job properly or not – who rates the raters? The above question has been suitably answered by Bank for International Settlement (BIS). The BIS suggests that the quality of rating of a rating agency may best be judged by its default and transition statistics over a period of time horizon. That means, the quality of services of a rating agency is reflected by two statistical analyses of the performances.
Default statistics means how many ratings in each rating categories has defaulted over a period of time. For example how many AAA ratings have defaulted over the last ten years and at what point of time compared to the number of AAA ratings. The above default reflects the quality of rating. For example, a rating agency assigned AA rating (high investment grade) to an issue. Over a period of only, say, two years it has defaulted, indicating poor quality of rating.
Transition statistics means how many ratings of a rating category moved upward or downward over a period of time. For example, how many “A” ratings have moved upward to AA or moved down to BBB or BB and at what point of time. Moving down a “AA” rated issue to BBB over, say, two years of time indicate poor quality of rating and so forth.
Understanding the accuracy of above tests, the BIS has asked the regulators to check the Default and Transition statistics of a rating agency before it is recognized as External Credit Assessment Institute (ECAI) to rate the banking counter parties for capital adequacy of banks.
Under BASEL II Capital Adequacy determination under Standardized Approach, banks are required to calculate the same on the basis of the risk weight assigned to the counterparties by the External Credit Assessment Institutions (ECAI). In order to have the above, counterparties that is the banking clients will be required to approach the rating agencies recognized as ECAI by the Bangladesh Bank for ratings. These ratings are popularly known as Counterparty ratings.
Loan exposure ratings are the ratings (both short term and long term) assigned by a rating agency against individual exposures and its limits. A counterparty may have been enjoying various exposures say for example, Long term loan, short term cash credit, overdraft, non-funded guarantees, non funded back to back facilities etc. from a single bank or from many banks. Ratings of the above individual exposures are called Exposure ratings. Therefore, the counterparties may ask for rating of individual exposures or counterparty rating. The Counterparty ratings cover all bank facility exposures as an entity.
Counterparties will be significantly benefited from credit rating under BASEL-II Capital Adequacy framework. Under the present system, banks are required to calculate capital adequacy at the rate 10% of the risk weighted assets against all corporate clients irrespective of risk being undertaken by bank through corporate financing. Under BASEL-II regime, risk weight determination will be on the basis of the credit rating of the counterparties. A counterparty having good rating will be risk weighted less which ultimately assists the bank to operate with less capital. In view of the above counterparties, having good rating will be able to get the loans at less cost under BASEL-II regime. On the other hand, risky clients having bad rating will be knowing their problems to ultimately improve their position and to have better rating in future.
Banks globally operate with a very limited capital and as such banks are highly leveraged. Therefore, clients with good rating can be handled with less capital requirement and in view of above a bank can significantly increase its business if it has good rated clients. In the above way a bank can maximize its business with good rated clients. In addition, the default risk will significantly decrease with the above counterparty ratings.
Credit Rating is an independent opinion on the ability and willingness of a borrower in discharging its obligations as principal and interest as per time schedule. These opinions are provided by the rating agencies that have a license from the regulatory body, Securities and Exchange Commission.
Auditing provides an opinion as to whether the books of accounts are maintained as per the accounting standard and how far the accounts reflect true and fair position of an organization on a particular date.
Ratings are considered to be an independent, impartial, professional and best judged opinion. These ratings will look at the risks involved against an exposure professionally and on continuous basis as against loan pricing by bank when facilities are provided. Ratings surveillance will assist the banks to see and update the risk against exposure of the clients.
The rating process takes about three weeks after submission of initial information. The time taken critically depends on speed of information flow from clients.
The total exposure includes all funded and non funded facilities. Funded facilities include all short term loans such as working capital loan, overdrafts, time loans etc and long term loans including project finance, BMRE loans etc. The non-funded exposures include LC, Guarantee etc.
CRISL Long Term ratings remain valid for one year while the short term rating remains valid for six months from the date of declaration.
The bank will initially nominate one or two ECAIs and advise the clients to select ECAI. Based on the above, the clients will nominate an ECAI for its rating. The client, will then enter into a rating contract with the rating agency/(ECAI).
All banks need individual exposures to be rated for it capital adequacy reporting purpose. All banks cannot utilize a single exposure rating of a particular client because, all the exposures might not be secured with the same amount and quality of securities. However, the entity rating of the group of companies maybe used by all banks for corporate guarantee and issues specific purpose.
Yes, initially banks may try to keep the risky clients unrated. However, with the above attitude, the bank will be inhibiting more risk in the portfolio than 125%. Under supervisory review, the Bangladesh Bank, if reviews the situation as such that for the unrated black-box the less capita than requirement, it may impose additional capital.
Long Term rating, since the same is revolving in nature and unless there are any exceptional circumstances, these loans are renewed by banks.
Rating is not a pre-requisite for a loan sanction/renewal of working capital facilities. However, a bank could insist on a rating for the loan/facility before sanction renewal, as it would help the bank in saving capital and also provide an additional input for the bank in deciding on the terms of the loan.
A company that has borrowed from a consortium of lenders can get the entire loan amount or facility rated by CRISL at one go; a rating issued for the entire facility can be submitted to all the banks of the consortium.
Rating requests are usually made by the borrower, with payment of the applicable rating fees. Since clients are the direct beneficiary of rating. However, CRISL can enter into specific arrangements for obtaining its fees from banks. In all cases, CRISL will require the borrower to sign a rating mandate before the rating exercise can be initiated.
The current rating fee is extremely low, compared to the responsibility, assigned by the regulations. A rating agency is required to keep the rating under its surveillance throughout the year. Any upward, downward trend is to be recognized and reported. In our country the rating fee charged by the rating agencies are even less than the audit fee which is required once in a year. Rating fees in Bangladesh are substantially lower compared to other regional agencies.