Why Bangladesh needs more credit rating agencies
Monday, 14 September 2009
Jamaluddin Ahmed PhD, FCA
Bangladesh, being a small country and having the lowest indicators in the report of Transparency International in terms of corruption, political instability and low and poor infrastructure, is still defined as one of the fastest growing economy (+/- 5.00% - 6.5% GDP growth) in the world. One would argue in favour of private sector and individuals who practically created this development in last 10-15 years without much support from the Govt. The garments sector is doing well (exporting around $ 10.0b), apart from current world wide recession. Bangladeshi expatriates are still contributing a lot to the country by increasing the foreign exchange (FX) reserve (now >$ 9.0b) and economic development with their very hard-hearted earnings. Telecommunication sector, which are mostly in private hands, is giving the highest amount of VAT/taxes to the Govt. and bringing more then 50% of foreign direct investment (FDI) in last couple of years.
On the other hand, on the infrastructure side, govt. agencies (power, roads, railways) have failed to keep the pace with economic development, which all of we know very well. Country's stock market has also developed because of very good response from private sector and has been showing good indices during the last couple of years. The regulator, Securities and Exchange Commission (SEC) along with Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE), has initiated quite good steps towards this development and achievement. They also managed to help generate good confidence among the investors in the market as well as the companies being enlisted. Furthermore, the SEC also enacted the Credit Rating Companies Rules to establish the mandatory rating process for some type of issues and debt instruments. Apart from this as per Bangladesh Insurance Law, the insurance companies are also bound to do the rating annually. Currently only two companies are there to look after this sector. Question now arises about their credibility, capability, quality and pricing for the services, considering the current market demand.
One newspaper report, published on September 02, 2009, narrated some irrational and baseless comments on the rating business in Bangladesh to mislead the readers and most importantly the regulators. One really could not stop oneself to comment on those information and put observation on the dire need for credit rating business in Bangladesh as a whole.
Firstly, this report was published at a time when SEC is in the process of evaluating the possibility of registering some more companies, based on the increased market demand for this kind of service. Critics argue that this was made to influence the SEC with some baseless and illogical facts and numbers, hiding poor capacity of existing service providers. Secondly, the comparative data of credit rating companies in other countries, as were given in the report under mention, are merely mis-statement of facts and figures. Ideally, the number of credit rating agencies would be determined by the size of market which will ultimately suggest how many rating companies does need to be operated. The two existing companies argued that they are enough for Bangladesh comparing the "number of rating companies and country size" of India, China, Malaysia, Pakistan etc. But they have not cited the market size of each country, side by side, along with the number of rating companies. They argued in favour of Bangladesh, being a small country with small market size and thus stated that there is no requirement for further rating companies. But the market size in all areas in Bangladesh is quite large (52 banks with around 6,500 branches, 29 financial institutions and 60 insurance companies) compared to the size of the country and also its economy. Based on the comparative numbers, how come Bangladesh, being a small country, is having a higher number of banks compared to Malaysia (12), Korea (42), Sri Lanka (19) & Pakistan (39) and 82% of India (62) and China (62)? How come Bangladesh, being a small country with small economy, has the highest numbers of insurance companies (60) compared to all those six countries? So the comparison here only on the number of credit rating companies is meaningless but it should be based on the market size where the rating will be done. Practically I see no problem in submitting application for registration (11 in this case) by any interested company, provided there is no bar to number of submission by the SEC. Proper evaluation would entail the right companies to prevail in the process who fulfill all the criteria and requirements for registration. We still don't know how many of 11 have all the required and right qualifications.
On the other hand, even within the available qualifications, there could be differences in grades in various qualification criteria. I trust fixing a proper criteria with justifiable grades would only ensure right evaluation and, thus, proper selection. I would argue for registration of all, if they have the right qualification. I believe that in an open market scenario, one can not stop others to act if they possesses the right qualification and core competence to perform the job. Thirdly, it is believed that the quality of the rating will improve in competition, not under monopolistic situation where currently only two companies are ruling the whole market. Quality of the rating also depends on the quality and integrity of the people who rate others.
There is a serious doubt about the integrity and professionalism of the couple of people in existing two companies who are running the rating business in Bangladesh. They should see their status first before questioning about future entrants. It is the market that will determine who is qualified or ethical and is maintaining the quality, not I or we as a provider of that services. Fourthly, it is a surprise to hear that the revenue earnings of existing companies should be minimum Taka 60 million (6.00 crore) before allowing any new company in the market. How come that is argued for, without evaluating any market demand, existing companies capabilities/quality and future competitiveness? Can anyone show an example where business is allowed to grow only on the revenue yardsticks and not on other factors? It is believed that if someone provides good and quality services, then he can easily fetch a larger share of revenue from that particular industry (e.g. Grameenphone, still having 50% market shares both in revenue and subscribers, even after Teletalk and Warid entered into market around three to four years back). One should believe that the regulator will never ensure revenue or profitability of any specific company but will create the level playing field to work so that the players earn revenue in a competitive environment.
Lastly, it is also a surprise to see that one of the most important issues was left out totally in the report. We all are aware of the fact that all banks are required to follow BASEL II Convention from 2010 as per Bangladesh Bank (BB) requirement. Accordingly, the banks have already started reporting on that, side by side with existing format. In short, Basel II will demand that each bank has to maintain the required amount of capital based on the "quality of their portfolio". This means bad quality loans/portfolios will require a high amount of capital reserve by the bank. There is a formula to calculate that.
To judge this capital requirement, the Bangladesh Bank (BB) has decided that all banks have to have the credit rating from 2009 onward. To evaluate the quality of portfolio, a substantial number of borrowers of each bank has also to be rated by the independent raters.
If I argue for at least 50 borrowers (it will be eventually much larger, I guess) of each bank needs credit rating, then it will be at least 2,500 credit rating to be done, in a year, in addition to 48 banks themselves. It is known that all the CEOs/MDs of all banks have already expressed their de-satisfaction on the quality of services of current two rating companies who are incapable of meeting the demands of this, in their meeting with the Parliamentary Standing Committee on Finance Ministry last month.
Accordingly, the Committee has also advised the concerned authority to take necessary steps in this connection. We congratulate them as they have highlighted a very vital issue to take care of. On the other hand, the BB has already advised the SEC to register more rating companies to meet the requirement of BASEL II implementation from this year. The surprise is here that the existing two companies, being totally aware of this requirement and already registered themselves with BB (see their web site) for that purpose, did not mention anything about this and did intentionally ignor that, in the views expressed in that report.
In conclusion, like a lot of other believers (corporate houses, Bangladesh Bank and individual banks), one would also strongly believe that another three to five more companies are immediately required to be registered to cater to the huge demand in the market. This step will definitely bring the right competitiveness in this sector and will ensure improved quality in the services.
Market also expects that the SEC will think to make this rating mandatory for all the low and new performing companies (say Z or G category) listed in Stock Exchange in future for better understanding of their debt commitments. Independent professionals also believe that in future, the existing two companies will be careful in their comments which are misleading, unjust, unprofessional and intentionally hiding the facts which they claim themselves to be ethical and maintaining the quality.
The writer is a partner, Hoda Vasi Chowdhury & Co, an independent correspondent firm to Deloitte Touche Tohmatsu. He may be reached at e-mail: jamal@hodavasi.com
Bangladesh, being a small country and having the lowest indicators in the report of Transparency International in terms of corruption, political instability and low and poor infrastructure, is still defined as one of the fastest growing economy (+/- 5.00% - 6.5% GDP growth) in the world. One would argue in favour of private sector and individuals who practically created this development in last 10-15 years without much support from the Govt. The garments sector is doing well (exporting around $ 10.0b), apart from current world wide recession. Bangladeshi expatriates are still contributing a lot to the country by increasing the foreign exchange (FX) reserve (now >$ 9.0b) and economic development with their very hard-hearted earnings. Telecommunication sector, which are mostly in private hands, is giving the highest amount of VAT/taxes to the Govt. and bringing more then 50% of foreign direct investment (FDI) in last couple of years.
On the other hand, on the infrastructure side, govt. agencies (power, roads, railways) have failed to keep the pace with economic development, which all of we know very well. Country's stock market has also developed because of very good response from private sector and has been showing good indices during the last couple of years. The regulator, Securities and Exchange Commission (SEC) along with Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE), has initiated quite good steps towards this development and achievement. They also managed to help generate good confidence among the investors in the market as well as the companies being enlisted. Furthermore, the SEC also enacted the Credit Rating Companies Rules to establish the mandatory rating process for some type of issues and debt instruments. Apart from this as per Bangladesh Insurance Law, the insurance companies are also bound to do the rating annually. Currently only two companies are there to look after this sector. Question now arises about their credibility, capability, quality and pricing for the services, considering the current market demand.
One newspaper report, published on September 02, 2009, narrated some irrational and baseless comments on the rating business in Bangladesh to mislead the readers and most importantly the regulators. One really could not stop oneself to comment on those information and put observation on the dire need for credit rating business in Bangladesh as a whole.
Firstly, this report was published at a time when SEC is in the process of evaluating the possibility of registering some more companies, based on the increased market demand for this kind of service. Critics argue that this was made to influence the SEC with some baseless and illogical facts and numbers, hiding poor capacity of existing service providers. Secondly, the comparative data of credit rating companies in other countries, as were given in the report under mention, are merely mis-statement of facts and figures. Ideally, the number of credit rating agencies would be determined by the size of market which will ultimately suggest how many rating companies does need to be operated. The two existing companies argued that they are enough for Bangladesh comparing the "number of rating companies and country size" of India, China, Malaysia, Pakistan etc. But they have not cited the market size of each country, side by side, along with the number of rating companies. They argued in favour of Bangladesh, being a small country with small market size and thus stated that there is no requirement for further rating companies. But the market size in all areas in Bangladesh is quite large (52 banks with around 6,500 branches, 29 financial institutions and 60 insurance companies) compared to the size of the country and also its economy. Based on the comparative numbers, how come Bangladesh, being a small country, is having a higher number of banks compared to Malaysia (12), Korea (42), Sri Lanka (19) & Pakistan (39) and 82% of India (62) and China (62)? How come Bangladesh, being a small country with small economy, has the highest numbers of insurance companies (60) compared to all those six countries? So the comparison here only on the number of credit rating companies is meaningless but it should be based on the market size where the rating will be done. Practically I see no problem in submitting application for registration (11 in this case) by any interested company, provided there is no bar to number of submission by the SEC. Proper evaluation would entail the right companies to prevail in the process who fulfill all the criteria and requirements for registration. We still don't know how many of 11 have all the required and right qualifications.
On the other hand, even within the available qualifications, there could be differences in grades in various qualification criteria. I trust fixing a proper criteria with justifiable grades would only ensure right evaluation and, thus, proper selection. I would argue for registration of all, if they have the right qualification. I believe that in an open market scenario, one can not stop others to act if they possesses the right qualification and core competence to perform the job. Thirdly, it is believed that the quality of the rating will improve in competition, not under monopolistic situation where currently only two companies are ruling the whole market. Quality of the rating also depends on the quality and integrity of the people who rate others.
There is a serious doubt about the integrity and professionalism of the couple of people in existing two companies who are running the rating business in Bangladesh. They should see their status first before questioning about future entrants. It is the market that will determine who is qualified or ethical and is maintaining the quality, not I or we as a provider of that services. Fourthly, it is a surprise to hear that the revenue earnings of existing companies should be minimum Taka 60 million (6.00 crore) before allowing any new company in the market. How come that is argued for, without evaluating any market demand, existing companies capabilities/quality and future competitiveness? Can anyone show an example where business is allowed to grow only on the revenue yardsticks and not on other factors? It is believed that if someone provides good and quality services, then he can easily fetch a larger share of revenue from that particular industry (e.g. Grameenphone, still having 50% market shares both in revenue and subscribers, even after Teletalk and Warid entered into market around three to four years back). One should believe that the regulator will never ensure revenue or profitability of any specific company but will create the level playing field to work so that the players earn revenue in a competitive environment.
Lastly, it is also a surprise to see that one of the most important issues was left out totally in the report. We all are aware of the fact that all banks are required to follow BASEL II Convention from 2010 as per Bangladesh Bank (BB) requirement. Accordingly, the banks have already started reporting on that, side by side with existing format. In short, Basel II will demand that each bank has to maintain the required amount of capital based on the "quality of their portfolio". This means bad quality loans/portfolios will require a high amount of capital reserve by the bank. There is a formula to calculate that.
To judge this capital requirement, the Bangladesh Bank (BB) has decided that all banks have to have the credit rating from 2009 onward. To evaluate the quality of portfolio, a substantial number of borrowers of each bank has also to be rated by the independent raters.
If I argue for at least 50 borrowers (it will be eventually much larger, I guess) of each bank needs credit rating, then it will be at least 2,500 credit rating to be done, in a year, in addition to 48 banks themselves. It is known that all the CEOs/MDs of all banks have already expressed their de-satisfaction on the quality of services of current two rating companies who are incapable of meeting the demands of this, in their meeting with the Parliamentary Standing Committee on Finance Ministry last month.
Accordingly, the Committee has also advised the concerned authority to take necessary steps in this connection. We congratulate them as they have highlighted a very vital issue to take care of. On the other hand, the BB has already advised the SEC to register more rating companies to meet the requirement of BASEL II implementation from this year. The surprise is here that the existing two companies, being totally aware of this requirement and already registered themselves with BB (see their web site) for that purpose, did not mention anything about this and did intentionally ignor that, in the views expressed in that report.
In conclusion, like a lot of other believers (corporate houses, Bangladesh Bank and individual banks), one would also strongly believe that another three to five more companies are immediately required to be registered to cater to the huge demand in the market. This step will definitely bring the right competitiveness in this sector and will ensure improved quality in the services.
Market also expects that the SEC will think to make this rating mandatory for all the low and new performing companies (say Z or G category) listed in Stock Exchange in future for better understanding of their debt commitments. Independent professionals also believe that in future, the existing two companies will be careful in their comments which are misleading, unjust, unprofessional and intentionally hiding the facts which they claim themselves to be ethical and maintaining the quality.
The writer is a partner, Hoda Vasi Chowdhury & Co, an independent correspondent firm to Deloitte Touche Tohmatsu. He may be reached at e-mail: jamal@hodavasi.com