Credit rating : operation and effectiveness

Abstract

This report is written on credit rating, operation and effectiveness and functions of domestic Credit Rating Agencies a study on National Credit Ratings Limited. This report addresses definition of credit rating and its benefits, methodology followed by NCR, context of Basel II, current practices in Bangladesh and recommendation and thereon. The credit rating system emerged as a private sector institution in the middle of the 19th century. Although the concept of credit rating emerged in early twentieth century in the financial market of USA, it is still new in the developing countries like Bangladesh and no rating agency was licensed in the country till 2002, hence no rating was published .Currently there are 08 recognized external credit rating institutions are operating in Bangladesh which is more than the requirement considering the size of our economy. Established regulatory framework and regulatory body is there to monitor the activities of the credit rating companies CRAs act as corporate gatekeepers to bridge the gap of asymmetric information between lenders, investors and issuers about the creditworthiness of companies or business. Credit rating is the assessment of the credit worthiness of a particular borrower with reference to a particular debt or financial obligations. It has certain advantages like Market access, Build up market reputation, Lower cost of funding, distinguish oneself from the competition, Regulatory Requirement, Enables quicker processing of loans and enchantments and independent view of the entity‟s strengths and weakness. With the implementation of Basel II in the context of Pillar 1, a regulatory capital requirement for credit risk is calculated according to two alternative approaches: (I) the Standardized Approach; and (ii) the Internal Ratings-Based Approach. The Standardized Approach is generally conducted worldwide by independent Credit Rating Agency (CRA).Different methodology is followed while conducting the rating. As in Bangladesh there is quite a few number of credit rating agencies operating in Bangladesh fierce competition exist which allows rating as shopping with low price and conflict of interests. Few standards need to follow by all the credit rating company to judge a rating. Regulatory bodies should monitor the credit rating agencies activities more closely to establish an additional layer of safety and incorporate proper guidelines so that it is useful for the parties involved, borrower as well as financial institutions.