Credit rating in Bangladesh
Tuesday, 8 May 2012
Muzaffar Ahmed
Credit Rating Information and Services Limited, now popularly known as CRISL, carries the history of credit rating in Bangladesh. Although the Bangladesh capital market does not have enough work for one credit rating agency to survive on commercial consideration as a full-fledged rating agency, the regulators have licensed in total eight rating agencies against five rating agencies in India, two rating agencies in Pakistan, two rating agencies in Sri Lanka and two rating agencies in Malaysia. Fortunately or unfortunately this writer himself is a member of the Board of Directors of Association of Credit Rating Agencies in Asia (ACRAA) -- an apex body of Asian Rating Agencies sponsored by Asian Development Bank (ADB) with its headquarters in Manila.
One of the most frequently asked question to this scribe in this international forum is: why are the regulators in Bangladesh destroying the image of this profession? Are they not aware of the requirements of the country? In CEOs Roundtable Conference at ACRAA held at Kuala Lumpur in 2011, this writer asked Dr. Datuk Ranjit Singh, the Managing Director of the Securities Commission of Malaysia who inaugurated the conference, why Malaysia, having a large economy, is continuing with only two rating agencies for almost 15 years. He smiled and replied, "Five years before there was a serious lobby for a third rating agency. But we have carefully reviewed the market and concluded that the existing two rating agencies are doing a fairly good job and maintaining the required standard and we felt that a third rating agency will destabilise the market, and then unfair competition may affect the quality of rating."
At present, there are a number of rules and regulations that are directed towards credit rating. The Credit Rating Companies Rules 1996 (subsequently amended in 2009) of the Securities and Exchange Commission (SEC) is the mother regulation which provides for the credit rating of all debt instruments and right offers of equity securities at a premium. The direct listing rules of Dhaka Stock Exchange (DSE) provides for having, at least, BBB rating to be eligible for the purpose. The Bangladesh Bank (BB) made credit rating mandatory for all banks with annual surveillance in 2006. The insurance regulator of the country also through a SRO made the credit rating compulsory for all the general insurance companies and biannually for all life insurance companies.
CRISL is the outcome of a repetitive request to Mr. Mobassar Husain, a founder director of CRISL from the first Chairman of the SEC in Bangladesh, Mr. Sultanuz Zaman in 1994 to explore the feasibility of floating a rating agency in the private sector. Mr. Mobassar Husain who was this writer's boss in MIDAS advised him (this scribe) to explore the idea. Mr. Zaman also introduced this writer to the CRISIL India, the first credit rating agency there that was set up in 1984, for possible assistance. At the request of the SEC Chairman and Mr. Husain, we visited CRISIL India and had long discussions with them. They showed their reluctance then to provide us with any technical support. The second raring agency of India, ICRA was ready to provide technical support but they were not interested to participate in equity.
CRISL submitted its application for licence on July 12, 1995. On receipt of the application from CRISL, the SEC felt the need for having a regulation to control and monitor the credit rating agencies. After the review of the regional practices, the SEC decided to promulgate the Credit Rating Companies Rules 1996 which, inter alia, contained provision that a rating agency must have an internationally reputed rating agency as a joint venture partner. In order to comply with the above, CRISL had to look for an international rating agency. CRISL contacted both Standards and Poor's, and Moody's Investors Services for possible collaboration. But none of the above global rating agencies was operating even in this sub-continent. At that point of time, the Duff and Phelps Credit Rating Company (DCR) was contemplating to set up the second rating agency in Pakistan along with the Muslim Commercial Bank of Pakistan and Vital Information Services (VIS), a data research private sector organisation. Mr. Husain Lawai, Chairman of Muslim Commercial Bank along with Mr. Faheem Ahmed of VIS visited Bangladesh and after several discussions concluded a Memorandum of Understanding with CRISL promoters to join CRISL both in shareholding and arranging a joint venture with DCR, Chicago, the third largest rating agency of the USA.
While finalizing the above joint venture among DCR, Muslim Commercial Bank and VIS in a closely held meeting at Orlando, the USA in 1997, for cost effective transfer of technical assistance to CRISL, DCR proposed to include Rating Agency Malaysia Berhad in CRISL equity which was accepted by all. The above joint venture agreement was submitted to the SEC with the request to offer licence. However, it was bad luck for CRISL that during the above period there were significant changes in the SEC's top management. After several representations to the SEC, it came up with the proposal that CRISL should include IFC of the World Bank or Asian Development Bank in CRISL equity as both the above organisations had the experience of promoting rating agencies globally and also in Pakistan. CRISL agreed to the proposal and IFC came into the picture and agreed to carry out a feasibility study. IFC took almost three years (1998 to 2000), during which period one of the senior officials of the SEC visited DCR at Chicago to review its performance in order to accept DCR as joint venture partner of CRISL. The IFC, after almost 18 months of review, concluded that the Bangladesh economy does have sufficient rating assignments to set up a viable rating agency. Considering the request of the SEC, they came up with a proposal to form a new company with the representatives of CRISL, FMO, IFC and Kfw, keeping DCR as technical partner with the understanding that if a rating agency was established it might need a significant amount of donated fund at the initial stage.
The IFC further proposed that Investment Corporation of Bangladesh (ICB) should be excluded from CRISL equity since it considers ICB's participation as a conflict of interest. But the above proposal of IFC and SEC was not acceptable to the CRISL shareholders since ICB was participating at the special request of CRISL director to promote a rating agency.
The CRISL promoters were totally frustrated at the decision of the SEC, since they had accepted the capital from Malaysia and Prime Commercial Bank of Pakistan (by that time the MCB was taken over by Prime Commercial Bank of Pakistan). Some of the promoter directors were in favour of winding up the company and to refund the capital. But Mr. Jamal Uddin Ahmad, Chairman of CRISL and this writer himself were in favour of pursuing the issue about obtaining the SEC's licence. A legal notice was also issued to the SEC as to why CRISL should not get the licence since it had involved the SEC at every step. At the request of some shareholders the CRISL board closed the CRISL office on the 16th floor of BSB Bhaban, freezed the bank account after settling all outstanding dues against rent and utility bills of BSB Bhaban and the CRISL CEO's office was shifted to one room of the office of Pride Group on the sixth floor of Scout Bhaban.
At the end of 2001, the SEC Chairman suddenly asked CRISL CEO to see him at his office and advised him to make a presentation before its top management as to how he considers a rating agency a commercially sustainable organisation. The SEC also asked to explain, if it gives a licence to CRISL at that time whether its technical partner, specially Duff and Phelps, will be interested to honour the agreement.
By that time, DCR was taken over by Fitch Rating Agency. When Fitch was contacted, they categorically replied that since the SEC could not decide on the licence for a long time, they were at this stage not interested to honour the earlier joint venture agreement signed by DCR. The SEC officials also contacted the Fitch directly and also received the same reply. But the SEC was serious about giving the licence to CRISL in order to fulfil the requirement of bond market development with technical assistance from the World Bank. Finally, the SEC amended the Credit Rating Companies Rules 1996 by replacing the words, 'international reputed', by the words, 'any reputed foreign rating agency'. Based on the above amendment, the SEC agreed to consider the joint venture with RAM as compliance with the requirement of its regulation. Based on the above, the SEC issued the letter of intent to CRISL with a large number of requirements including development of database, rating methodology etc. It took up to April 2002 to fulfil all requirements and to get finally licence on April 22, 2002.
Bangladesh rating industry started its journey with the mandatory requirement of having credit rating for all public debt instruments, right offer issues and shares issued at a premium before the same were offered to the public. But it was very difficult to survive on a sustainable basis for a rating agency from such few rating assignments in the market. But the regulators, without reviewing the market, gave licence to a second rating agency in 2004, thus, making the sustainability more difficult for two rating agencies.
By that time, CRISL rating reports were appearing to be very useful for the users; specially CRISL rating report on the then Al Baraka Bank convinced the Bangladesh Bank of the need of credit rating and it took the initiative to make mandatory for all banks to have credit rating before it goes for public offering. The banking regulator further decided to make it mandatory for all banks to submit credit rating reports to the regulator within six months after the finalisation of accounts.
Following the example of the central bank, the insurance regulator also came up with the requirement to make rating mandatory for all general insurance companies every year and for the life insurance companies bi-annually. The Dhaka Stock Exchange, while issuing the direct listing regulations, made the credit rating mandatory before a company applie for direct listing. The above regulations created an enabling environment for credit rating in the country's capital and financial markets.
The concept of client rating by the rating agencies to support capital adequacy of the banks came up in view of the need for implementation of Base-II capital adequacy framework by Bangladesh Bank. Under Basel-II framework, Bangladesh Bank adopted a standardized approach for credit risk under which the services of rating agencies were required under certain strict terms and conditions. Bank client rating is a very sensitive issue in view of the fact that most of the private sector companies, enjoying banking facilities, are not maintaining standard financials for appropriate evaluation. In addition, the businesses of the clients are directly affected by the economy, government policy and many other considerations, in addition to the factors dependent on the sponsors. Unless and until all the above factors are properly evaluated through sectoral studies, the ratings are bound to give wrong signals.
The client rating has created an environment for a mushroom growth of such agencies in Bangladesh as many people have started considering it as a solid business proposition without going into greater details. However, rating is a research on fundamentals. The fate of the rating agencies is absolutely uncertain and the current scenario is bound to destroy the rating market and ultimately most of the rating agencies are bound to face closure, with the moving of the banks towards Internal Rating Based (IRB)-approach as per road map of Bangladesh Bank.
The rating industry in Bangladesh is now considered to be a parentless industry. The behaviour of the regulators towards nourishing this industry does not appear to be rational. As the researcher and initiator of this highly prestigious global profession, this scribe feels frustrated not because of the reason that there is a mushroom growth of licensing. The frustration is rather about the management of the regulatory framework. The authorities concerned have remained careless, while being responsible for creating such a bad environment. The rating agencies are still defined by the SEC rules as an investment advisory company. This has not changed over a long time. The paid-up capital still remains at Tk 5.0 million (50 lakh), to start a rating agency by any group of sponsors. The regulators will realise the adverse consequences of such a situation at certain point of time when the total industry will lose its credibility in the national and international market.
The writer is a FCMA, FCS, and
president and chief executive
officer of CRISL
Credit Rating Information and Services Limited, now popularly known as CRISL, carries the history of credit rating in Bangladesh. Although the Bangladesh capital market does not have enough work for one credit rating agency to survive on commercial consideration as a full-fledged rating agency, the regulators have licensed in total eight rating agencies against five rating agencies in India, two rating agencies in Pakistan, two rating agencies in Sri Lanka and two rating agencies in Malaysia. Fortunately or unfortunately this writer himself is a member of the Board of Directors of Association of Credit Rating Agencies in Asia (ACRAA) -- an apex body of Asian Rating Agencies sponsored by Asian Development Bank (ADB) with its headquarters in Manila.
One of the most frequently asked question to this scribe in this international forum is: why are the regulators in Bangladesh destroying the image of this profession? Are they not aware of the requirements of the country? In CEOs Roundtable Conference at ACRAA held at Kuala Lumpur in 2011, this writer asked Dr. Datuk Ranjit Singh, the Managing Director of the Securities Commission of Malaysia who inaugurated the conference, why Malaysia, having a large economy, is continuing with only two rating agencies for almost 15 years. He smiled and replied, "Five years before there was a serious lobby for a third rating agency. But we have carefully reviewed the market and concluded that the existing two rating agencies are doing a fairly good job and maintaining the required standard and we felt that a third rating agency will destabilise the market, and then unfair competition may affect the quality of rating."
At present, there are a number of rules and regulations that are directed towards credit rating. The Credit Rating Companies Rules 1996 (subsequently amended in 2009) of the Securities and Exchange Commission (SEC) is the mother regulation which provides for the credit rating of all debt instruments and right offers of equity securities at a premium. The direct listing rules of Dhaka Stock Exchange (DSE) provides for having, at least, BBB rating to be eligible for the purpose. The Bangladesh Bank (BB) made credit rating mandatory for all banks with annual surveillance in 2006. The insurance regulator of the country also through a SRO made the credit rating compulsory for all the general insurance companies and biannually for all life insurance companies.
CRISL is the outcome of a repetitive request to Mr. Mobassar Husain, a founder director of CRISL from the first Chairman of the SEC in Bangladesh, Mr. Sultanuz Zaman in 1994 to explore the feasibility of floating a rating agency in the private sector. Mr. Mobassar Husain who was this writer's boss in MIDAS advised him (this scribe) to explore the idea. Mr. Zaman also introduced this writer to the CRISIL India, the first credit rating agency there that was set up in 1984, for possible assistance. At the request of the SEC Chairman and Mr. Husain, we visited CRISIL India and had long discussions with them. They showed their reluctance then to provide us with any technical support. The second raring agency of India, ICRA was ready to provide technical support but they were not interested to participate in equity.
CRISL submitted its application for licence on July 12, 1995. On receipt of the application from CRISL, the SEC felt the need for having a regulation to control and monitor the credit rating agencies. After the review of the regional practices, the SEC decided to promulgate the Credit Rating Companies Rules 1996 which, inter alia, contained provision that a rating agency must have an internationally reputed rating agency as a joint venture partner. In order to comply with the above, CRISL had to look for an international rating agency. CRISL contacted both Standards and Poor's, and Moody's Investors Services for possible collaboration. But none of the above global rating agencies was operating even in this sub-continent. At that point of time, the Duff and Phelps Credit Rating Company (DCR) was contemplating to set up the second rating agency in Pakistan along with the Muslim Commercial Bank of Pakistan and Vital Information Services (VIS), a data research private sector organisation. Mr. Husain Lawai, Chairman of Muslim Commercial Bank along with Mr. Faheem Ahmed of VIS visited Bangladesh and after several discussions concluded a Memorandum of Understanding with CRISL promoters to join CRISL both in shareholding and arranging a joint venture with DCR, Chicago, the third largest rating agency of the USA.
While finalizing the above joint venture among DCR, Muslim Commercial Bank and VIS in a closely held meeting at Orlando, the USA in 1997, for cost effective transfer of technical assistance to CRISL, DCR proposed to include Rating Agency Malaysia Berhad in CRISL equity which was accepted by all. The above joint venture agreement was submitted to the SEC with the request to offer licence. However, it was bad luck for CRISL that during the above period there were significant changes in the SEC's top management. After several representations to the SEC, it came up with the proposal that CRISL should include IFC of the World Bank or Asian Development Bank in CRISL equity as both the above organisations had the experience of promoting rating agencies globally and also in Pakistan. CRISL agreed to the proposal and IFC came into the picture and agreed to carry out a feasibility study. IFC took almost three years (1998 to 2000), during which period one of the senior officials of the SEC visited DCR at Chicago to review its performance in order to accept DCR as joint venture partner of CRISL. The IFC, after almost 18 months of review, concluded that the Bangladesh economy does have sufficient rating assignments to set up a viable rating agency. Considering the request of the SEC, they came up with a proposal to form a new company with the representatives of CRISL, FMO, IFC and Kfw, keeping DCR as technical partner with the understanding that if a rating agency was established it might need a significant amount of donated fund at the initial stage.
The IFC further proposed that Investment Corporation of Bangladesh (ICB) should be excluded from CRISL equity since it considers ICB's participation as a conflict of interest. But the above proposal of IFC and SEC was not acceptable to the CRISL shareholders since ICB was participating at the special request of CRISL director to promote a rating agency.
The CRISL promoters were totally frustrated at the decision of the SEC, since they had accepted the capital from Malaysia and Prime Commercial Bank of Pakistan (by that time the MCB was taken over by Prime Commercial Bank of Pakistan). Some of the promoter directors were in favour of winding up the company and to refund the capital. But Mr. Jamal Uddin Ahmad, Chairman of CRISL and this writer himself were in favour of pursuing the issue about obtaining the SEC's licence. A legal notice was also issued to the SEC as to why CRISL should not get the licence since it had involved the SEC at every step. At the request of some shareholders the CRISL board closed the CRISL office on the 16th floor of BSB Bhaban, freezed the bank account after settling all outstanding dues against rent and utility bills of BSB Bhaban and the CRISL CEO's office was shifted to one room of the office of Pride Group on the sixth floor of Scout Bhaban.
At the end of 2001, the SEC Chairman suddenly asked CRISL CEO to see him at his office and advised him to make a presentation before its top management as to how he considers a rating agency a commercially sustainable organisation. The SEC also asked to explain, if it gives a licence to CRISL at that time whether its technical partner, specially Duff and Phelps, will be interested to honour the agreement.
By that time, DCR was taken over by Fitch Rating Agency. When Fitch was contacted, they categorically replied that since the SEC could not decide on the licence for a long time, they were at this stage not interested to honour the earlier joint venture agreement signed by DCR. The SEC officials also contacted the Fitch directly and also received the same reply. But the SEC was serious about giving the licence to CRISL in order to fulfil the requirement of bond market development with technical assistance from the World Bank. Finally, the SEC amended the Credit Rating Companies Rules 1996 by replacing the words, 'international reputed', by the words, 'any reputed foreign rating agency'. Based on the above amendment, the SEC agreed to consider the joint venture with RAM as compliance with the requirement of its regulation. Based on the above, the SEC issued the letter of intent to CRISL with a large number of requirements including development of database, rating methodology etc. It took up to April 2002 to fulfil all requirements and to get finally licence on April 22, 2002.
Bangladesh rating industry started its journey with the mandatory requirement of having credit rating for all public debt instruments, right offer issues and shares issued at a premium before the same were offered to the public. But it was very difficult to survive on a sustainable basis for a rating agency from such few rating assignments in the market. But the regulators, without reviewing the market, gave licence to a second rating agency in 2004, thus, making the sustainability more difficult for two rating agencies.
By that time, CRISL rating reports were appearing to be very useful for the users; specially CRISL rating report on the then Al Baraka Bank convinced the Bangladesh Bank of the need of credit rating and it took the initiative to make mandatory for all banks to have credit rating before it goes for public offering. The banking regulator further decided to make it mandatory for all banks to submit credit rating reports to the regulator within six months after the finalisation of accounts.
Following the example of the central bank, the insurance regulator also came up with the requirement to make rating mandatory for all general insurance companies every year and for the life insurance companies bi-annually. The Dhaka Stock Exchange, while issuing the direct listing regulations, made the credit rating mandatory before a company applie for direct listing. The above regulations created an enabling environment for credit rating in the country's capital and financial markets.
The concept of client rating by the rating agencies to support capital adequacy of the banks came up in view of the need for implementation of Base-II capital adequacy framework by Bangladesh Bank. Under Basel-II framework, Bangladesh Bank adopted a standardized approach for credit risk under which the services of rating agencies were required under certain strict terms and conditions. Bank client rating is a very sensitive issue in view of the fact that most of the private sector companies, enjoying banking facilities, are not maintaining standard financials for appropriate evaluation. In addition, the businesses of the clients are directly affected by the economy, government policy and many other considerations, in addition to the factors dependent on the sponsors. Unless and until all the above factors are properly evaluated through sectoral studies, the ratings are bound to give wrong signals.
The client rating has created an environment for a mushroom growth of such agencies in Bangladesh as many people have started considering it as a solid business proposition without going into greater details. However, rating is a research on fundamentals. The fate of the rating agencies is absolutely uncertain and the current scenario is bound to destroy the rating market and ultimately most of the rating agencies are bound to face closure, with the moving of the banks towards Internal Rating Based (IRB)-approach as per road map of Bangladesh Bank.
The rating industry in Bangladesh is now considered to be a parentless industry. The behaviour of the regulators towards nourishing this industry does not appear to be rational. As the researcher and initiator of this highly prestigious global profession, this scribe feels frustrated not because of the reason that there is a mushroom growth of licensing. The frustration is rather about the management of the regulatory framework. The authorities concerned have remained careless, while being responsible for creating such a bad environment. The rating agencies are still defined by the SEC rules as an investment advisory company. This has not changed over a long time. The paid-up capital still remains at Tk 5.0 million (50 lakh), to start a rating agency by any group of sponsors. The regulators will realise the adverse consequences of such a situation at certain point of time when the total industry will lose its credibility in the national and international market.
The writer is a FCMA, FCS, and
president and chief executive
officer of CRISL