BB issues guidelines for eligibility of ECAIs

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Siddique Islam
The central bank has issued guidelines for recognition of eligible external credit assessment institutions (ECAIs) to assess credit risks in line with the Basel-II framework.
"We've taken the move aiming to improve the overall risks management efficiency of the banks," a senior official of the Bangladesh Bank (BB) told the FE Thursday.
He also said the central bank will publish advertisements shortly seeking applications from interested credit rating agencies, both local and foreign, in this connection.
Currently, two local credit rating agencies - Credit Rating Information and Services Limited (CRISL) and Credit Rating Agency of Bangladesh (CRAB) - are now operating in Bangladesh.
"We'll select eligible credit rating agencies for assessment of the credit risks of the counterparties of the banks," another BB official said, adding that the capital adequacy risk would be determined on the basis of the ECAI rating report on counterparty of the bank concerned.
The central bank has set six criteria for selection of the eligible ECAIs that produce credit assessments of sufficiently high quality, uniformity and potency to be used by the banks. Such ECAIs will be eligible for recognition by the BB for regulatory capital purpose.
The criteria of ECAI recognition and mapping process of risk weight have been developed in line with the Basel-II standards, according to the guidelines.
"The capital adequacy risk may be reduced particularly for private companies following assessment of their credit risks by the ECAIs," he observed.
"....credit rating is to be determined on the basis of risk profile assessed by the ECAIs duly recognised by the BB," the central bank said in a circular, issued Thursday.
"All scheduled banks will be required to nominate recognised ECAI for their own as well as their counterparty credit rating," the circular said.
However, the assessments must be subject to ongoing review and responsive to change in financial condition of the concerned entity. An assessment methodology for each market segment, including rigorous back-testing, must have been established for at least one year and preferably three years.
The central bank has already increased the amount of the required minimum capital for commercial banks to 10 per cent of their risk-weighted assets from 9.0 per cent to consolidate its capital base aiming to implement the Basel-II framework.
The Basel-II accord will be implemented in Bangladesh from January 2009 in line with the global standard.
The new Basel accord has been prepared on the basis of three pillars: minimum capital requirement, supervisory review process and market discipline.
Three types of risks -- credit risk, market risk and operational risk -- have to be considered under the minimum capital requirement.
Bangladesh is now following Basel-I for banks' capital adequacy requirement. Risk-based capital ratio was 8.0 per cent when it was first adopted in 1996. Later in 2002, the ratio was increased to 9.0 per cent.