The not-so-trusted ratings

| Updated: October 24, 2017 00:04:19

The not-so-trusted ratings

There was no rating requirement of business entities in Bangladesh before mid-90s of the last century. Thereafter came the rating of the financial companies by the newly-formed rating agencies, which at the initial level, did not get any nod from any regulator. But after a while, because of lobbying by the rating companies, the regulator Bangladesh Securities Exchange Commission (BSEC) granted rating licences to them. By 2000, rating of the listed companies, specially the financial ones, became compulsory.

We have seen many banks getting rated by the licensed rating companies, but the noticeable aspect of such rating was that almost all banks and other non-bank finance institutions were getting A+ mark.  At one stage, taking rating from the rating agencies became a routine work only; everyone knew what would be the rating of a particular company being rated by a licensed rating agency. Initially, no one took the rating grades seriously and this writer believes the same is still so with the rating business in Bangladesh.

The world does not have many rating companies. The famous ones are Moody's and Standard & Poor's. But Bangladesh has till now eight licensed rating companies. As Bangladesh was liberal in granting licenses for the banking companies, so was with the ratings by the rating agencies. Good luck for the stakeholders! The rating industry in Bangladesh is not worth billions of taka. Had it been of high value in terms of money, then we could have seen a few more of such companies in the rating business.

What do the rating companies do in the Bangladesh context? They do rate companies by assigning alphabetical letters or levels. Normally for financial companies, they use alphabets like A, AA, AAA, BBB etc. to denote the financial soundness of those companies. If a banking company is rated AA, it will mean the bank is good in all respects. Another banking company having a rating AAA will mean even better.

For other companies and companies belonging to SME sector, the rating agencies assign levels such as SME-1, SME-3 etc. SME-1 means very excellent in performance. For such a company if a bank offers credit, the latter does not need to preserve any extra capital, i. e. the crediting bank can take credit as risk-free one. No reserve of capital is needed to be kept against such credit. That is why, banks are more eager to get the loan-seeking companies rated by any licensed rating agency.

But experience shows, the rating companies are too liberal in granting certificate of 'very good' to the SMEs applying for bank credit. As a result, banks are being led, though falsely, to give credit to these highly-rated SMEs without keeping adequate reserve against such credit. At the end, many of such credits turn bad loans. The rating companies, in order to get business, very liberally certify the loan-seeking companies 'as very good'. None questions what they certify.

The rating agencies themselves do not study anything about the companies they rate, but they follow the banks' financial statements certified already by the audit firms for the purpose of giving rating certificates. They do not generate any data on their own; rather they depend on the annual reports already compiled and certified by the audit firms. In that sense, the functions of rating companies are not that different at all; they are only using the statistics given out by the audit firms in cooperation with internal audits of the companies. The stakeholders do not have a role in assigning the task of rating by the rating agencies; the rating agencies are appointed by the management of the companies.

The regulator is also lax in ensuring quality of rating. The rating has become just a work for the sake of work; no one takes seriously what the rating agencies rate. But the case is not so in other countries. There, rating by the rating agencies matters. Though there too, sometimes the rating turns false, those cases are exceptions. In Bangladesh, most of the stakeholders know what is what about a company, even without having rating report at hand. The companies which require their business performances rated by the licensed rating agencies sometimes seem to be wasting money as there is no credibility of what the rating companies give out as ratings.

The regulator should issue regulatory instructions saying what a rating company must do when they rate a company. The public also should know how and what the rating companies do while rating a company.

The writer is Professor of Economics, University of Dhaka,
[email protected]


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