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Rating Benefits

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Benefits of ECRL Rating

A credit rating is an evaluation of the credit risk of a prospective debtor (an individual, a business, company or a government), predicting their ability to pay back the debt, and an implicit forecast of the likelihood of the debtor defaulting. Credit rating represents an evaluation of a credit rating agency of the qualitative and quantitative information for the prospective debtor, including information provided by the prospective debtor and other non-public information obtained by the credit rating agency’s analysts. There are three major international credit rating agencies: Standard & Poor’s, Fitch Rating and Moody’s Rating. Following the application of credit rating in the international level, almost every country has approved and employed local credit rating agencies.

Benefits to the Business

Gives an insight on the financial health of a company
Gives an indication of how the company is performing in absolute terms
Helps compare a company’s credit worthiness against its competitors both nationwide and worldwide
Gives an indication of how a company is expected to perform in the future and whether it is well placed to repay its debts and meet its overall financial obligations.
Increased securitization of borrowing and lending consequent to disintermediation.
Improves corporate image which may lead to growth & expansion of business
Lowers cost of borrowing with an access to wider audience for borrowing
Ability to act as marketing tools for new or less renowned companies

Bangladesh Mandate for Credit Rating

Credit Rating Mapping by Bangladesh Bank

To be more risk sensitive and shock resilient against credit, market and operational risk, the depository institutions (e.g. Banks and NBFI’s) are asked by the Bangladesh Bank to maintain some minimum Capital against its assets. Bangladesh Bank put on guidelines on how to calculate the banks’ Capital Adequacy Ratio (CAR). CAR to be maintained by depository institutions are to be minimum of 10% as per Basel II, upon implementation of BASEL III by January 2020, the CAR will be 12% (BRPD circular no. 7).

Relevance of Credit Rating In The Light of Basel II

• Basel II has been adopted by Bangladesh Bank in January 2010 and since then it has been applied to scheduled banks and financial institutions operating in Bangladesh
• Basel II is now statutory compliance requirement for all banking companies operating in Bangladesh
• In order to calculate CAR, banks are required to calculate their Risk Weighted Assets (RWA) on the basis of risk weight mapping circulated by BB against the credit rating assessment made by listed External Credit Rating Agencies (ECAI)

Changes After Implementation of Basel III

• Bangladesh Bank through BRPD circular no. 7 dated March 31, 2014 introduced Basel III in Bangladesh
• Roadmap for Basel II prescribed by Banking Regulation & Policy Department is as follows:

Previously Capital Adequacy Ratio calculated in Basel II will now be termed as Capital to Risk-weighted Asset Ratio (CRAR) in Basel III, and will be calculated as per guidelines of Basel III:

To calculate Capital to Risk-weighted Asset Ratio (CRAR), banks are required to calculate their Risk Weighted Assets (RWA) on the basis of credit, market, and operational risks.