Credit rating: Are we aware of?

Kash Ahsan Sometimes we do borrow money from formal or non-formal sources. It may be from institutes or from individuals. Banks, leasing companies or insurance companies are the main formal sources for borrowing money. Have we thought in which process banks lend us money? Banks or non-bank financial institutions (NBFI) lend money for their own good, not for the benefit of the general people. Where there is profit there is some threats. Threats are to repay. Even the most solvent may be rejected if they are unlikely to act in a way that will generate profit for lenders. So credit is the most important issue both for lenders and for borrowers. The sooner we understand banks are here to make money, not help us, the better we can play the system. Poor credit will have difficulty to find financing as well as have to pay more due to the risk of default. Credit rating provides an independent and fair opinion on the credit worthiness of an entity or instrument. All banks in Bangladesh are required to adopt standardised approach to measure the Risk Weighted Assets (RWA) and have to compute capital requirement in line with the revised risk base. In this regard, banks are to compel to rate their borrowers, and this is the reason to know about credit rating. Except that, commonly we have to know about credit rating for share market. Publicly listed companies are bounded to disclose their financial condition especially for banks and NBFIs according to the Securities and Exchange Commission (SEC) laws. Now why will we rate our credit or what it stands for? In plain words, Credit Rating stands for rating your credit professionally. It is a process. It is an assessment of the credit worthiness both of individuals and institutions. Rating is to draw on the basis of its history of the borrowing and repayment, as well as the availability of assets and the extent of their liabilities. Perhaps, we have seen that our banks and NBFIs are publishing their credit rating reports in the newspapers. In most of the cases we overlook those reports or do not understand what does it mean. Sometimes question arises- who does this work? In our country there are some companies who exclusively deal with this important issue. They are also registered as Joint Stock Company (JSC) in the Securities and Exchange Commission. They independently handle this matter carefully as they are committed to the SEC and to their clients. They are namely Credit Rating Agency of Bangladesh (CRAB), Credit Rating Information and Services Ltd (CRISL), Emerging Credit Rating Ltd (ECRL), National Credit Rating Ltd (NCRL), ARGUS Credit Ratings Services Ltd (ACRSL) and Dun and Bradstreet. Except Dun and Bradstreet, all are registered with the SEC. Generally, the credit rating agencies work to find out their client's financial condition and all related aspects, i.e. ownership pattern, corporate governance, all kinds of risks, etc. They analyse clients' assets, asset quality and operation management along with their efficiency in business operation. They also analyse the clients' industry as well as forecast their future. Liquidity or capital adequacy is one of the most important issues in business arena. The rating agencies also look for those aspects. Fund utilisation abilities of the companies are the other working sector of those agencies. Considering the time frame, there are two types of rating. They are mainly Long-term Rating and Short-term Rating. The different rating agency uses different rating grades. Long-term rating is done on the basis of a company's performance, i.e. ability to pay debt services liabilities (DSL), CAR, etc. for more than one year. And short-term rating has to draw on the basis of the abilities for the payments of immediate liabilities, initially it is one or less than one year. Finally, we should have to keep in mind that rating agencies do not give any guarantee in which they have given their grades. It is not an indication of how secure the company or the investment or even the instrument is. And they also do not recommend for investment. Most of the time, they do not consider many aspects related with an investment decision, i.e. the reasonableness of the issue price, possibilities for capital gains or take into account the liquidity. Although these are often related to the credit risk, the rating is essentially an opinion on the relative quality of the credit risk. (The writer is a development planner and working as Research Officer in the Dhaka WASA. He can be reached at email: kashahsan@hotmail.com)