Regulatory Framework and Role of Domestic Credit Rating Agencies in Bangladesh

Date: November 2013
Type: Papers and Briefs
Country:
Subject:
Series: South Asia Working Papers
Author: Tsunoda, Jiro; Ahmed, Muzaffar; Islam, Mohammed Tajul

Description

The Securities and Exchange Commission of Bangladesh (SECB) promulgated the Credit Rating Companies Rules, 1996 for investor protection in issuing debt securities and public issue of shares. Two domestic credit rating agencies were licensed by the SECB after 2002, which were later accorded status of external credit assessment institutions by Bangladesh Bank. Thereafter, the SECB and Bangladesh Bank issued rules and regulations toward mandatory ratings which led to the building of information frameworks critical to the efficiency of financial markets. Investors could now optimize their risk–return profiles, monitor their portfolios through regular surveillance and credit rating adjustments, and have timely information for trading and risk management.

Recently, domestic credit rating agencies have come to play a more crucial role since the capital adequacy of commercial banks has been tied to rating assessment of bank investments. The use of credit rating is expected to lead to the establishment of acceptable measures of credit risk evaluation so that commercial banks can meet Basel II regulatory prescriptions. As Bangladesh Bank accords external credit assessment institutions status to more domestic credit rating agencies banking sector financing to corporate borrowers is receiving a boost. The number of domestic credit rating agencies operational in Bangladesh has risen from two to seven between 2010 and 2013.

Furthermore, Bangladesh Bank plans to introduce ratings for small and medium-sized enterprises (SMEs) and a customized credit assessment framework for SMEs including a separate rating scale and notation that sets SMEs ratings apart from the usual bank loan ratings. Access to adequate financing is still a chronic problem for SMEs in Asia and here, credit ratings could fill a critical gap in the credit information continuum, moving away from collateral-based lending to risk-based lending.

Contents

  • Abstract
  • The Genesis of Domestic Credit Rating Agencies in Bangladesh
  • Credit Rating Agencies in Bangladesh that are Recognized as External Credit Assessment Institutions by Bangladesh Bank
  • How Rating Agencies are Governed Globally
  • Regulatory Framework for Domestic Credit Rating Agencies in Bangladesh
  • Performance of Domestic Credit Rating Agencies in Bangladesh with reference to the ADB Handbook on Best Practice Compliance
  • Credit Information Bureau versus Credit Rating Agency
  • Implementing the Basel II Guidelines of Capital Adequacy Framework for Commercial Banks adn the Role of Domestic Credit Rating Agencies
  • Internal Credit Ratings by Commercial Banks in Bangladesh
  • Prospects for Credit Rating in Bangladesh within a Basel II Regime
  • Bangladesh Bank's Move toward Rating Small and Medium-Sized Enterprises
  • Conclusions
  • Appendixes