Despite struggling with capital and provisioning shortfalls, as well as a large volume of non-performing and defaulted loans, most of the stressed banks received good ratings from credit rating agencies over the past years. Even those banks now undergoing mergers achieved A+ to AA in long-term ratings and ST-2 in short-term ratings in consecutive years.
Credit rating is one of the most vital indicators for banks to determine their strength in terms of liquidity, coverage, leverage, future prospects, and to analyse their SWOT. It clearly instils confidence among customers by presenting a holistic picture of a bank's strength.
In past years, however, the scenario presented was often contradictory to the actual stance. Hiding defaulted and non-performing loans, along with showing fictitious income, was a common practice for banks seeking to appear stronger than they actually were.
As a small-sized economy, Bangladesh has eight credit rating agencies, which makes it misleading to assess a healthy picture. Countries like India, Pakistan, the Philippines, and others, which are stronger than Bangladesh, operate with fewer agencies.
This ornamental rating system not only undermines trust in banking but also creates severe risks for sustainability. Audit firms are also liable for such fabrication. Credit rating agencies conduct their assessments largely based on audit reports, relying about 60 per cent on audits to determine financial indicators. The remaining 40 per cent concerns non-financial issues. In effect, most of the accountability is transferred to the audit firms. These practices devalue potential in economic sectors and create a poor benchmark for the banking sector.
It is very disappointing to see ratings as high as AAA for heavily burdened banks. Even some banks that sank under enormous defaulted loans achieved BBB+ in previous records.
When the banking sector is grappling with bad debts, it is now imperative to eradicate the existing irregularities in credit ratings and audit reports. Bangladesh Bank, BSEC, and other relevant authorities must take immediate action to prevent the situation from worsening further.
Kawsik Azad Pronoy
A Banker
