Crediting rating agencies play the vital role in the decision making process of the

financial system". Elaborate the statement on the basis of importance to BFIs, investors
and regulators.

Credit rating is an analysis of the credit risks associated with a financial instrument or a
financial entity. It is a rating given to a particular entity based on the credentials and the
extent to which the financial statements of the entity are sound, in terms of borrowing and
lending that has been done in the past. Credit ratings are intended to provide a long-term view
of creditworthiness based on fundamental analysis. Unlike market-based indicators such as
bond spreads or credit default swap prices, ratings do not reflect market sentiment or the
dynamics of supply and demand.

When we talk about the financial market then credit rating agencies also come along with it.
Credit rating agencies have an important role in the decision making process whether or not
investors want to invest in particular field, company and this gives the idea how safe it is to
make an investment. When we talk about the global context then things related to the
finances are being tracked by the credit bureau whether it’s an individual or business entity in
developed world while developing nation are also trying to adopt this tool. Credit rating gives
the information about the performance of the company or an individual in the money
management and how much trustworthy to invest on them. Credit rating agencies keep the
record of the amount of loan that is taken from particular banking &financial institution and
keeps track of the repayment or payback period. Basically credit rating agencies basically
gives the credit score based on the payment history,amount owed,length of credit history,new
credit ,type of credit used based on the calculation from FICO software. Ratings also meet the
need for less well-known issuers to gain market access by having information and analysis of
their credit widely available on a comparable basis. Furthermore, the capital markets are
playing a greater role in financing governments, companies and consumers a trend that is
likely to continue for years to come as banks become subject to higher capital requirements
and other restrictions. The role of credit rating in the financial system said that, ratings play
many important roles in the capital markets, helping country and companies gain access to
funding for initiatives that promote prosperity and jobs. Ratings play a role in portfolio
diversification as well as encouraging a more liquid flow of capital. There are also a various
example that bank and financial institution that fail because of lending money to the
companies that have poor credit score because of the financial instability, poor management,
market position of the company. it is very important for the bank and financial institution to
take the risk carefully by not taking risk on the people’s deposits. And as we have the latest
case about the bank collapse from bad loans. When we apply for credit card, mortgage the
bank will look after our salary sheet or income level and based on our position they suggest
the amount that they are will to bet on us.
Example : In India Yes bank collapse because of bad loans to the non performing companies
In the lieu of high-interest rate. And companies that yes bank granted easy loans to
companies such as Reliance telecom IL&FS, Dewan Housing, Jet Airways, Cox & Kings,
CG Power, Cafe Coffee Day knowing they were in regular financial loss.
There are various thing that need to be consider before investing your money in any
companies or business field. Credit rating agencies gives the information about the current
position to invest and based on how much risk investor is willing to take in his money. While
ratings are important, they are certainly not the only source of information available to the
credit markets. Investors draw on many different sources, including their own analysis, other
research houses and local rating agencies. They are very clear in telling us that they make
their own decisions and do not rely mechanistically on ratings from the major agencies. when
a person is betting in a new company or company that does not have great rating then there is
a huge chance that will make the investor to recover his investment. basically credit rating
agencies want to aware investors about the amount of risk they are taking by investing in
certain companies. There are various rating that investors need to look like corporate credit
risk, Sovereign credit risk. When we are investing in the third country it is very important to
look at the amount of risk that it is there like political, economy and based on how much
advantage it is there you have to do business in foreign land need to be taken into account.
there are various credit agencies that publishes the credit score about the country based on
easiest country to do business.
Example: Based on Business Index 2019 Nepal is placed at 94 th position on easiest country
for doing business. better the spot it attracts foreign companies to invest in the country.

ICRA Nepal which is the only credit rating agency in the country and it is working under the
license from Securities Board of Nepal (SEBON) or it is also being regulated by the SEBON
to make the fair practices of the credit rating of the organization. ICRA Nepal considers all
relevant factors that have a bearing on the future cash generation of the issuer. These factors
include: industry characteristics, competitive position of the issuer, operating efficiency,
management quality, commitment to new projects and other associate companies, and
funding policies of the issuer In context of Nepal, we don’t have the individual credit score
but there is the rating available of the few companies related to insurance and other private
business organization. Credit score helps bank and financial institution to about the
repayment capacity of the customer and based on that it will help them to minimize the risk
when giving loan to the business organization. while now when bank and financial institution
want to give loan to the particular person then they make visit to look their business, if he/she
is employed then they will ask for their proof of salary sheet to be in safe side. As of now if a
person have taken loan from a bank then this record can be traced and outstanding amount
can also be traced. so, this make difficult for the people who have intention to do financial
fraud and alert bank about their repayment capacity and current financial position. Credit
rating agencies also have their functions and based on that they evaluated the associated risk
in the financial system by doing the business analysis, evaluation of the industrial risks,
looking operating efficiency, statement of profits, management capacity to overcome adverse
situation, assent quality, financial position and others.