Credit Rating Information and Services Limited

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Credit Rating Information and Services Limited

Credit Rating Information and Services Limited (CRISL) [1] is the first credit rating company in Bangladesh. This company was incorporated with the Registrar of Joint Stock Companies in 1992 and Credit Rating Company rules 1996 as a recognized ECAI, [2] and has been operating as the first rating company in the country since 1995.

A credit rating is an evaluation of the credit risk of a prospective debtor, predicting their ability to pay back the debt, and an implicit forecast of the likelihood of the debtor defaulting. The credit rating represents an evaluation of a credit rating agency of the qualitative and quantitative information for the prospective debtor, including information provided by the prospective debtor and other non-public information obtained by the credit rating agency's analysts.

Bangladesh Country in South Asia

Bangladesh, officially the People's Republic of Bangladesh, is a country in South Asia. It is the world's 8th-most populous country with a population exceeding 162,951,560 people. In area, it is the 92nd-largest country, spanning 147,570 square kilometres (56,980 sq mi). It shares land borders with India to the west and Myanmar to the east. It is also one of the most densely-populated countries in the world. Dhaka is its capital and largest city, and is also the economic, political and the cultural center of Bangladesh, followed by Chittagong, which has the country's largest port. Bangladesh forms the largest and eastern part of the Bengal region. The country's geography is dominated by the Bengal delta, the largest delta in the world. The country has many rivers and 8,046 km (5,000 mi) of inland waterways. Highlands with evergreen forests are found in the northeastern and southeastern regions of the country. The country also has the longest sea beach and the largest mangrove forest in the world. The country's biodiversity includes a vast array of plants and wildlife, including the endangered Bengal tiger, the national animal.

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Rating history in Bangladesh

Initially, all credit risk assessments were done internally by SEC Bangladesh (Security Exchange Commission of Bangladesh). [3] which acts as the regulatory body of the external rating institutions. This scenario has been changing slowly as dependency and trust on ECAI is growing stronger.

A credit risk is the risk of default on a debt that may arise from a borrower failing to make required payments. In the first resort, the risk is that of the lender and includes lost principal and interest, disruption to cash flows, and increased collection costs. The loss may be complete or partial. In an efficient market, higher levels of credit risk will be associated with higher borrowing costs. Because of this, measures of borrowing costs such as yield spreads can be used to infer credit risk levels based on assessments by market participants.

Bank loan exposure rating in Bangladesh

Financing in Bangladesh economy is more bank loan oriented compared to capital market or bond market. Clients prefer availing banking facilities to finance their business for its easy accessibility and business-friendly relationship. In addition, the private sector is more "private limited", company oriented and structurally accessible to capital market for private limited companies is not open. Therefore, these companies are not required to go through stringent regulatory compliance to get finance. However, commercial banks are required to assess risk in standard format against all loans before the same is sanctioned. Considering the increase in risk in all economic sectors due to various reasons, the central bank asked all commercial banks to assess the client risk and tie the same with its capital adequacy requirement. This risks are to be assessed by External Credit Assessment Institutions (ECAI) as recognized by the Bangladesh Bank under Basel II Capital Adequacy framework.

Capital market financial market for medium and long-term capital raising

A capital market is a financial market in which long-term debt or equity-backed securities are bought and sold. Capital markets channel the wealth of savers to those who can put it to long-term productive use, such as companies or governments making long-term investments. Financial regulators like the Bank of England (BoE) and the U.S. Securities and Exchange Commission (SEC) oversee capital markets to protect investors against fraud, among other duties.

Bond market financial market where participants can issue new debt or buy and sell debt securities

The bond market is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market. This is usually in the form of bonds, but it may include notes, bills, and so on.

Bangladesh Bank central bank of Bangladesh and member of the Asian Clearing Union

Bangladesh Bank is the central bank of Bangladesh and is a member of the Asian Clearing Union.

The 'Capital Adequacy' for bank simply means, a bank must have adequate capital for risk absorption that are arising from various risks including financing.

Under Basel II Capital adequacy framework as adopted by Bangladesh Bank vide Circular No 9 dated 31 December 2008 and subsequently revised on December 29, 2010, the risk weight is to be carried out on the basis of the ratings of ECAI. If loans are not rated, for Tk 100 corporate exposure/loan, the risk weighted assets would be Tk. 125 (125% of the exposure) which translates to 12.5% capital requirement. The above is only in respect of credit risk. Bangladesh Bank also asked the scheduled banks to maintain capital for Operational Risk as well as for Market Risk. The above Bangladesh Bank circular warrants the banks to have more capital compared to the present amount in the bank reserves. Therefore, banks will be required to rate its loan portfolio by recognized rating agencies in order to keep the capital requirement lower.

Basel II is the second of the Basel Accords,, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision.

Status of rating agencies in Bangladesh

Bangladesh Bank has currently given recognition to Seven [4] Credit Rating companies.

Who rates the raters

See also

Related Research Articles

Bank regulation is a form of government regulation which subjects banks to certain requirements, restrictions and guidelines, designed to create market transparency between banking institutions and the individuals and corporations with whom they conduct business, among other things. As regulation focusing on key actors in the financial markets, it forms one of the three components of financial law, the other two being case law and self-regulating market practices.

A capital requirement is the amount of capital a bank or other financial institution has to have as required by its financial regulator. This is usually expressed as a capital adequacy ratio of equity as a percentage of risk-weighted assets. These requirements are put into place to ensure that these institutions do not take on excess leverage and become insolvent. Capital requirements govern the ratio of equity to debt, recorded on the liabilities and equity side of a firm's balance sheet. They should not be confused with reserve requirements, which govern the assets side of a bank's balance sheet—in particular, the proportion of its assets it must hold in cash or highly-liquid assets. Capital is a source of funds not a use of funds.

Capital Adequacy Ratio (CAR) is also known as Capital to Risk (Weighted) Assets Ratio (CRAR), is the ratio of a bank's capital to its risk. National regulators track a bank's CAR to ensure that it can absorb a reasonable amount of loss and complies with statutory Capital requirements.

The term Advanced IRB or A-IRB is an abbreviation of advanced internal ratings-based approach, and it refers to a set of credit risk measurement techniques proposed under Basel II capital adequacy rules for banking institutions.

The term Foundation IRB or F-IRB is an abbreviation of foundation internal ratings-based approach, and it refers to a set of credit risk measurement techniques proposed under Basel II capital adequacy rules for banking institutions.

The term standardized approach refers to a set of credit risk measurement techniques proposed under Basel II capital adequacy rules for banking institutions.

Asset and liability management is the practice of managing financial risks that arise due to mismatches between the assets and liabilities as part of an investment strategy in financial accounting.

Credit Rating Agency of Bangladesh Ltd. (CRAB) is the leading credit rating company in Bangladesh.

The Capital Requirements Directives (CRD) for the financial services industry have introduced a supervisory framework in the European Union which reflects the Basel II and Basel III rules on capital measurement and capital standards.

The CELS ratings or Camels rating is a supervisory rating system originally developed in the U.S. to classify a bank's overall condition. It is applied to every bank and credit union in the U.S. and is also implemented outside the U.S. by various banking supervisory regulators.

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Basel III is a global, voluntary regulatory framework on bank capital adequacy, stress testing, and market liquidity risk. This third installment of the Basel Accords was developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007–08. It is intended to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage.

Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling their related cash flows to third party investors as securities, which may be described as bonds, pass-through securities, or collateralized debt obligations (CDOs). Investors are repaid from the principal and interest cash flows collected from the underlying debt and redistributed through the capital structure of the new financing. Securities backed by mortgage receivables are called mortgage-backed securities (MBS), while those backed by other types of receivables are asset-backed securities (ABS).

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Under the Basel II guidelines, banks are allowed to use their own estimated risk parameters for the purpose of calculating regulatory capital. This is known as the internal ratings-based (IRB) approach to capital requirements for credit risk. Only banks meeting certain minimum conditions, disclosure requirements and approval from their national supervisor are allowed to use this approach in estimating capital for various exposures.

Southeast Bank Limited is a private commercial bank in Bangladesh.

The Capital Requirements Regulation(EU) No. 575/2013 is an EU law that aims to decrease the likelihood that banks go insolvent. With the Credit Institutions Directive 2013 the Capital Requirements Regulation 2013 reflects Basel III rules on capital measurement and capital standards.

References

  1. ↑ CRISL, website "Credit Rating Information and Services Limited (CRISL)", Crisl Website, accessed April 19, 2011.
  2. ↑ ECAI Meaning, website "ECAI Definition", ECAI Definition, accessed April 19, 2011.
  3. ↑ SEC, website "List of ECAI in Bangladesh", SEC references, accessed April 19, 2011.
  4. ↑ ""List of Credit Rating Companies in Bangladesh"". Archived from the original on 2007-04-30. Retrieved 2012-02-28.
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