Regional: Best Practice for Regulatory Framework and Use of Credit Rating Information of Domestic Credit Rating Agencies in South Asia

Sovereign Project | 43431-012

Summary

This TA aims to continue ADB's support (since 1987) for strenghtening the institutional and technical capacities of DCRAs in South Asia be developing and building international best practices and contributing to policy dialogue for enhancing credibility and visibility of South Asia DCRAs.

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Project Name Best Practice for Regulatory Framework and Use of Credit Rating Information of Domestic Credit Rating Agencies in South Asia
Project Number 43431-012
Country Regional
Project Status Closed
Project Type / Modality of Assistance Technical Assistance
Source of Funding / Amount
TA 7527-REG: Best Practice for Regulatory Framework and Use of Credit Rating Information of Domestic Credit Rating Agencies in South Asia
Investment Climate Facilitation Fund under RCIFPF US$ 550,000.00
Strategic Agendas Inclusive economic growth
Regional integration
Drivers of Change Governance and capacity development
Partnerships
Private sector development
Sector / Subsector Finance - Finance sector development - Money and capital markets - Small and medium enterprise finance and leasing
Gender Equity and Mainstreaming
Description This TA aims to continue ADB's support (since 1987) for strenghtening the institutional and technical capacities of DCRAs in South Asia be developing and building international best practices and contributing to policy dialogue for enhancing credibility and visibility of South Asia DCRAs.
Project Rationale and Linkage to Country/Regional Strategy
Impact The TA will contribute to continuing economic growth and poverty reduction through the development of efficient national and regional financial systems with expanding volume and outreach.
Project Outcome
Description of Outcome The TA aims to develop national and regional financial markets through enhancing the transparency, accuracy, independency and the quality of credit rating information be provided by DCRAs in the region and and facilitate effective use of savings pool to meet the growing financing needs, especially for SME and infrastructure/PPP projects.
Progress Toward Outcome
Implementation Progress
Description of Project Outputs

The TA will conduct a study composed of three parts. First part is a country study on each South Asia country consisted of (i) regulatory framework and its best practice (the current and potential significance of the DCRAs, a role of the credit information bureau, regulation and supervision, enforcement mechanism, govenance issues, and a recommendation for a model regulatory framework), (ii) usage of credit rating information for SME financing (framework, modalities and the governance support for SME financing, constraints of SME financing and a function of credit rating information, the required conditions, policy recommendations and a case study), and (iii) usage of credit rating information for infrastructure/PPP financing (framework, modalities and the government support for infrastructure/PPP financing, constraints of infrastructure/PPP financing and a function of credit rating information, the required conditions, policy recommendations and a case study). Secondly, the TA will attempt to produce a model framework in the region for (i) regulation and supervision of DCRAs, (ii) usage of credit rating information for SME financing, and (iii) usage of credit rating information for infrastructure/PPP financing by complying each country study.Each country study will be compiled and summarized. Thirdly, the TA will prepare knowledge books on (i) a methodology for SME credit rating, and (ii) a methodology for infrastructure/PPP project credit rating.

The Ta will also plan to hold (i) a SOuth Asia regional forum to disseminate the outputs of the TA and to discuss on the current issues on the DCRAs among regulators (central banks, and securities regulators) and DCRAs, and (ii) a workshop in each South Asia country for disseminating the country study and the model framework in the region.

The TA will be implemented over 12 months starting April 2010 and ending March 2011.

Status of Implementation Progress (Outputs, Activities, and Issues)

A South Asia regional forum was held at the ADB Headquarters on 9 December 2010 to serve as a venue for discussing current issues on domestic credit rating agencies (DCRA), their regulation and functions for SME and PPP infrastructure financing together with the government officials, regulators (central banks and securities regulators) and management of the DCRAs in SARD countries. Country studies were conducted in Bangladesh, Bhutan, India, Maldives, Nepal, and Sri Lanka. Based on the findings of the country studies, a regional model framework was endeavored to develop these three areas. Those country studies provided the foundation and support in establishing a regulatory framework for domestic credit rating agency in Nepal and Maldives, where domestic credit rating agencies were established during implementation of this R-PATA. Further activities are still ongoing and outputs of those remaining activities are (i) conducting a country workshop in Sri Lanka , which was planned to be conducted in the first quarter of 2012, however, suspended due to unavailability of the government; (ii) publications of selective country studies; and (iii) preparation of knowledge outputs on credit rating methodology for SME and PPP financing.

Currently, the following country studies and methodology paper are in progress for publication and will be ready prior to TA completion date.

(i) Regulatory Framework and Role of Domestic Credit Rating Agencies in Bangladesh; (ii) Use of Credit Rating Information of Domestic Credit Rating Agencies for PPP in Bangladesh; and (iii) Credit Rating Methods for PPP Infrastructure Projects and SMEs in South Asia.

Geographical Location
Summary of Environmental and Social Aspects
Environmental Aspects
Involuntary Resettlement
Indigenous Peoples
Stakeholder Communication, Participation, and Consultation
During Project Design tbd
During Project Implementation tbd
Business Opportunities
Consulting Services

The TA will require approximately 5 person-months of international consultants composed of:

1. Resource Persons (1person-month)

2. Credit Rating Agency Specialist (2.5 person-months)

3. Credit Rating Agency Regulatory Specialist (0.5 person-month)

4. Credit Rating Methodology Specialist SME Financing (1 person-month)/ Credit Rating Methodology Specialist Infrastructure/PPP,

and National Consulting Services:

5. Credit Rating Methodology Specialist Infrastructure/PPP (1 person-month)

6. SME Finance Rating Specialist (5.5 person-months)

7. Infrastructure/PPP Financing Specialist (5.5 person-months, and

8. Workshop Coordination Consultant (2.5 person-months)

A. International Consultants

1. Resource Persons (international, 1person-month)

The technical assistance (TA) will require the services of resource persons (for a total of about 1 person-month) who are experts in credit rating regulations, credit rating services, SME financing, infrastructure/PPP finance, and debt market development according to the subjects of the proposed South Asia regional forum and a workshop in each country discussing the best practices and other matters as required . They will have the following responsibilities:

(i) Suggestion for the design and develop the forum, a workshop and/or best practices as required, and prepare detailed outlines.

(ii) Collate and prepare materials for participants as required.

(iii) Conduct presentation or address at the forum.

(iv) Assist in preparing a report after the forum and remaining issues and suggestions for possible follow-up activities.

2. Credit Rating Agency Specialist (international, 2.5 person-months)

The specialist will be an anchor for technical aspects and as a program manager in the proposed areas by the TA. The consultant will have extensive skills and experience in credit rating regulations, rating methodology and business practices of

credit rating agencies. He or she will monitor and review the quality of the study products that match the needs identified in the region. The tasks of the specialist will include but not be limited to the following:

(i) Monitoring and providing required suggestion the outputs of the country studies to be conducted by individual consultants.

(ii) Suggesting the necessary components and an outline format for the country study and the knowledge report on (a) a methodology for SME credit rating, and (b) a methodology for infrastructure / PPP project credit rating.

(iii)Review the outputs and recommendations of the country study of each South Asia county and providing comments to ensure quality of research.

(iv) Preparing the regional best practices report on a model framework for (a) regulation and supervision of DCRAs, (b) usage of credit rating information for SME financing, and (c) usage of credit rating information for infrastructure / PPP financing by compiling each country study. Each country study will be compiled and summarized.

(v) Preparing the forum proposals taking into the consideration of regulators' insights and business practices of the DCRAs in Asia. Supporting the organization of the forum and other seminars and workshops, as required and assist to conduct them.

(vi)Preparing a report of the progress of the entire project, and prepare presentations to ADB.

(vii)Coordinating various activities required for successful completion of the R-PATA.

(viii)Undertaking other tasks determined jointly with ADB staff members managing the program.

3. Credit Rating Agency Regulatory Specialist (international, 0.5 person-months)

The specialist will have an experience and knowledge on the regulatory issues on the credit rating agencies such as IOSCO practices and Basel II guidelines and business practices of rating agencies. Working experience in regulatory bodies for credit rating agencies or credit rating agencies is desirable.

(i) Review the outputs and recommendations of the country study of each South Asia county and providing comments to ensure quality of research.

(ii) Co-work in preparing the regional best practices report on a model framework for regulation and supervision of DCRAs, Each country study will be compiled and summarized.

(iii) Cowork in preparing the forum proposals taking into the consideration of regulators' insights and business practices of the DCRAs in Asia.

(iv) Prepare a presentation for a ad-hoc forum among rating agency regulators and DCRAs in South Asia and support to organize it as required.

4. Credit Rating Methodology Specialist SME Financing (1person-month) / Credit Rating Methodology Specialist Infrastructure/PPP (1 person-month)

The Specialists have sufficient experience, expertise abd knowlede in credit rating methodology in SME sector and infrastructure /PPP project. In coordinating with credit rating agency specialist, the specialists will prepare a knowledge reports for (i) a methodology for SME credit rating, and (ii) a methodology for infrastructure / PPP project credit rating, which will be used as a handbook for providing background of the credit rating information and credit risk components on SEM sector and infrastructure/ PPP financing project components.

B. National Consultants

5. Credit Rating Agency Regulatory Specialists (5.0 person-months, which is composed of specialists to be hired for the each country study.)

National Credit Rating Agency consultants have a sufficient experience and knowledge in the financial sector, the credit rating information and credit rating agency activities in each South Asia country.

(i) Identify the significance of the credit ratings and the existing/potenital role of the DCRAs in the financial sector. The analysis needs to cover: the status and the future direction of Basel II introduction by the central bank relevant to ECAI and IRB approach, the existing role of ECAI and future prospects commercial banks approach for IRB/ internal credit ratings, function of credit ratings in the capital market, especially for the bond market development potential usage of the credit ratings other than in capital market, and a direction of the new business expansion by DCRAs credit rating fees, and sustainability of the DCRA business model.

(ii) Identify the existing/potential regulatory framework on DCRAs and enforcement mechanism (International best practice in credit rating prepared by ADB in December 2008 will be used as a basis for this analysis).

(iii)Identify the existing operational and regulatory framework on the credit information bureau and clarify its difference from DCRAs.

(iv) Clarify the current/potential governance issues of DCRAs and/or GCRAs, and identify the compliance status of the proposed best practices by each DCRA.

(v) Suggest a model regulatory framework for securing the prudential role of the DCRAS and effective use of credit ratings in the financial market.

(vi) Conduct requirement analysis for implementing the model regulatory framework.

6. SME Financing Rating Specialist (5.5 person-months, which is composed of specialists[4] to be hired for the each country study)

Identify the framework of SME financing including definition of SME in the government/ the central bank's policy terminology, and relevant rules and guidelines for promoting SME financing.

(i) Identify the current financing modalities of SME financing by commercial banks, specialized banks for SME financing, finance companies, leasing companies, factoring companies and others.

(ii) Provide the statistical data of fund providers in SME financing, and identify the significance of those fund providers.

(iii)Provide the overview of the Government and public organizations' support in SME financing.

(iv) Conduct constraints analysis in SME financing. Suggest possible measures for mitigating the constraints and role of credit ratings in mitigating those constraints.

(v) Suggest the required environment for effective usage of credit ratings for SME financing.

(vi) Preliminary policy and business recommendations.

Case study

7. Infrastructure/PPP Financing Specialist (5.5 person-months, which is composed of specialists[5] to be hired for the each country study )

(i) Identify the framework of NFRASTRUCTURE/PPP financing including definition of INFRASTRUCTURE/PPP in government/ the central bank's policy terminology, if any and the relevant rules and guidelines for promoting INFRASTRUCTURE/PPP financing.

(ii) Identify the current financing modalities of INFRASTRUCTURE/PPP financing by commercial banks, specialized banks for INFRASTRUCTURE/PPP financing, finance companies, and others.

(iii) Provide the statistical data of fund providers in INFRASTRUCTURE/PPP financing, and identify the significance of those fund providers.

(iv) Provide the overview of the Government and public organizations' support in INFRASTRUCTURE/PPP financing.

(v) Conduct constraints analysis on INFRASTRUCTURE/PPP financing.

(vi) Suggest possible measures for mitigating the constraints and role of credit ratings in mitigating those constraints.

(vii) Suggest the required environment for effective usage of credit ratings for INFRASTRUCTURE/PPP financing.

(viii) Preliminary policy and business recommendations.

Case study

8. Workshop Coordination Consultant (2.5 person-months)

The consultant will provide logistic support for the international and national consultants' completion of their respective tasks especially for report preparation and for the South Asia regional forum and workshops for each country.

Responsible ADB Officer Peter Marro
Responsible ADB Department South Asia Department
Responsible ADB Division Public Management, Financial Sector and Trade Division, SARD
Executing Agencies
Asian Development Bank6 ADB Avenue, Mandaluyong
Metro Manila, Philippines
P.O. Box 789, 1099 Manila,
Philippines
Timetable
Concept Clearance 29 Sep 2009
Fact Finding 16 Dec 2009 to 19 Feb 2010
MRM -
Approval 11 May 2010
Last Review Mission -
Last PDS Update 26 Sep 2013

TA 7527-REG

Milestones
Approval Signing Date Effectivity Date Closing
Original Revised Actual
11 May 2010 - 11 May 2010 30 Apr 2011 31 Dec 2013 -
Financing Plan/TA Utilization Cumulative Disbursements
ADB Cofinancing Counterpart Total Date Amount
Gov Beneficiaries Project Sponsor Others
0.00 550,000.00 0.00 0.00 0.00 0.00 550,000.00 11 May 2010 425,529.03

Safeguard Documents

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Evaluation Documents

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The Public Communications Policy (PCP) establishes the disclosure requirements for documents and information ADB produces or requires to be produced in its operations to facilitate stakeholder participation in ADB's decision-making. For more information, refer to the Safeguard Policy Statement, Operations Manual F1, and Operations Manual L3.

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