Biased evaluation by rating agencies raises concern

The growing allegations of substandard and motivated rating of companies and loan cases by a section of rating agencies have raised serious concern among lending institutions and the regulators.
A number of rating agencies, while taking to the FE, have also expressed their strong suspicion about the quality of rating in the absence of regulatory supervision and monitoring.
Top executives of some rating agencies said only regular inspection of the rating firms by the regulatory bodies -the Bangladesh Bank (BB) and the Bangladesh Securities and Exchange Commission (BSEC) - could stop such type of unfair and unethical practices.
They have suggested strong inspection and monitoring following the detection of some irregularities committed by a particular rating company.
The Bangladesh Bank (BB), one of the regulatory organisations, conducted its annual inspection of that rating firm and found gross irregularities including violations of the country's Companies Act.
Private commercial firms take ratings from the country's eight rating agencies mainly for getting bank loans. Commercial banks usually remain worry-free while sanctioning loans to borrowers rated as stable performers by the rating agencies.
Professor Muzaffor Ahmed, president of CRISL, the country's oldest rating company, told the FE that many rating agencies did not follow the existing regulations while doing the rating exercise.
He said uneven competition among the rating firms is also another key reason for awarding 'improper' ratings.
Mr. Ahmed has suggested beefing up of manpower of the regulatory bodies to adequately monitor and supervise the activities of the country's eight rating agencies.
.Momin Ullah Patowary, managing director of the National Credit Rating Agency, told the FE that they had already asked the BSEC to take proper steps for inspecting them in order to avert wrong rating.
"Biased ratings will not happen if there are tight rules and regulations for the rating firms in the country," he said.
The government framed regulations in 1996 which were amended in 2009. It has provision of scrapping licences but Mr Patowary opined that rules in the case of rating and rating agencies should be made more stringent.
Mr Patowary said: "We come to know that one or two firms are involved in outsourcing of rating jobs. This is not acceptable."
He said the financial sector will face severe problem if the firms which take loans from the banks are not properly rated.
Banks keep low provisions against loans for firms which have very good scores given by the rating agencies.
He said the much-talked about Hall-Mark was rated 'very good' by a rating company and banks suffered for this.
Muhammed Asadullah, managing director at the Alpha Rating said the government should ensure representation of the rating agencies while framing improved guidelines for them.
He said the firms submit their reports to the BSEC and the BB.
When contacted, BSEC officials said they receive at least quarterly reports from the rating agencies.
"But we cannot evaluate those for lack of manpower," said a member at the BSEC.
There were two agencies earlier but now the number of the same is eight. 'How can we evaluate so many companies," the BSEC member asked.
More than 10,000 firms including banks and insurance companies seek from rating agencies the reports on their financial strengths.
The member, however, said the BSEC is now working on the inspection guidelines.
But, the BB inspects the rating agencies on annual basis and they also feel there should be strong inspection and monitoring of the rating agencies.
  

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