Muhammad Anisul Islam Financial market facilitates transfer of funds from surplus areas to deficit ones in exchange of handsome returns to lenders. This convinces the savers to forgo their current consumption. But it is unlikely that the lenders will give their valuable savings to someone about whom they have insufficient information (for example, information regarding borrowers' repayment tendency and capability, other outstanding liabilities, and default probability etc). Credit rating agencies, more popularly known as rating agencies, are invited in financial markets to provide market participants with the information regarding creditworthiness of borrowers. There are more than 130 rating agencies working in different areas of the world at present. Of them, the Moody's is the first credit rating company established by John Moody in 1909. These credit rating companies' responsibility is not to put a recommendation to lend to or invest in a particular entity. Rather they give their independent views about debtors' credit quality after reviewing credit history and related aspects. The Credit Rating Companies Rules, 1996 of the Bangladesh Securities and Exchange Commission (BSEC) defines credit rating companies 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 recognised and formal process of assigning rating to present or proposed loan obligations or equity of any business enterprise'. In developed countries like the US, the UK, and Germany, opinion of rating companies is evaluated very critically by investors. They adjust their investment portfolio instantaneously upon change in the opinion of rating companies about a particular entity. The rating company's rating of a particular company has significant influence on its stock performance. Thomas L. Friedman, a famous American journalist, columnist and author, rightly said once that 'there are two superpowers in the world today in my opinion. They're the United States and the Moody's bond rating service. The US can destroy you by dropping bombs, and the Moody's can destroy you by downgrading your bonds. And believe me, it's not clear sometimes who's more powerful'. While developed financial market highlights the need for rating agencies, in our financial market which is not big enough, the rating need is driven by obligation of the entities to comply with the regulator's requirement. Currently eight licensed rating companies are operating in our country and bearing the responsibility to provide credit rating services. The Credit Rating Information and Services Ltd (CRISL) is the first company in Bangladesh which was awarded a license by the regulator in 2002. To issue debt security and equity shares at premium (including rights share), issuers require taking rating from credit rating companies in Bangladesh. Scheduled commercial banks are also obliged to take periodic credit rating from these rating agencies. Under BASEL II capital adequacy framework which has been adopted by Bangladesh, banks are required to allocate risk weight to their assets based on rating given by these rating agencies. Rating companies provide both short-term and long-term credit rating focusing long-term trend ignoring short-term fluctuations. It is too early to comment on how well our credit rating companies are performing in our growing financial market. As the first rating company here took license 11 years back from now, people here are yet to incorporate rating score in a proper way in their investment decision. The securities regulator has issued licenses to eight credit rating agencies, which is highest in any South Asia and East Asian country, to rate the local companies. Increased competition among the rating companies has created an uneven bargaining power for the clients for managing 'superior ratings'. Companies are now switching from one rater to another in expectation of getting favourable rating. This situation is now termed as 'Rate Shopping' which is comparable to 'Opinion Shopping', the practice of searching for an outside auditor who will provide an unqualified accountant's opinion. The US has three rating companies only against five in India, four in Malaysia, and two in Pakistan. Though the BSEC has clear guidelines to stay with a particular rating agency for a period of four years including the initial rating year, some companies are disobeying this. Companies are only allowed to engage the second rating agency in addition to their former rating agency. Lowest rating given by new or former company will be the final rating. Higher number of rating agencies in Bangladesh is giving an undue scope to the local companies to bargain on different unethical matters. Companies now ask raters, prior to assessing them properly, which rating they will be awarded. Many companies even take two or three ratings from different agencies and use only the findings of the one that gives them better ranking. Increased number of rating companies is inviting the above-mentioned problems but what are the motivations behind an increase in rating company business? The bullish trend of rating agency business can be highly attributed to the implementation of BASEL II by the central bank in 2010. The paid-up capital required to set up a rating agency is BDT 5.0 million only. This is too little considering the present market scenario and any medium entrepreneur can afford it easily. Though raters require large amount of investment to set up comprehensive database management system and employ highly skilled financiers, they are compromising these investment expenditures which in turn reduce rating quality. New rating companies here do not require one-year test services to measure their qualitative assessment while in India, a new agency requires 'test services' for three years to enter full-fledged rating service company. Rating companies require sufficient income from their services to maintain cost of sophisticated database management system, team of expert financiers and quality service. But increased competition is shrinking their flow of income day by day. For example, earlier a rating company used to charge over BDT 0.3 million for short-term rating. Now the fee has come down. So it is becoming stiffer for them to maintain their rating quality prudently. The regulatory authority needs to understand that rating agencies are not like usual profit-making business. Rather they provide rating service to help borrowers judge the creditworthiness of the lender. It is a big enough reason to be concerned that the US economy which is larger by many folds than that of Bangladesh is served by only three rating agencies while we have surprisingly eight raters. If our authorities continue to welcome new rating agencies every year in our small economy, credit rating quality will go down and services of another rating agency will be demanded by market participants to rate the credit raters. The writer is an ex-intern of Lanka-Bangla Securities Limited and student of MBA 15th Batch, University of Dhaka. anis_dufin@yahoo.com
Whither rating agencies in Bangladesh?
FE Team | Published: October 12, 2013 00:00:00 | Updated: February 01, 2018 00:00:00
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