CHAPTER: 1

1.1 Introduction:

Term Paper is a compulsory course, which provides us with the opportunity to gain practical
knowledge. Now the world is very much competitive. Therefore, everybody has to be expert
in his or her field in both practical and theoretical knowledge. Premier University aims to
build future magnate with the theoretical knowledge as well as practical knowledge about the
finance field of our country. Term paper is a significant aspect in the direction of
accomplishing the goal. The term “Credit Rating” can be analyzed by dividing it in two
parts – credit and rating. Credit is taking money or some benefits from a lender for generating
some benefits with a promise to pay back the principle and the interest after a specific time.
Rating usually denotes to a symbol or on a relative judgment of something on a scale. So the
entire term ‘credit rating’ can be defined as a judgment or an opinion on the quality of a credit,
whether the creditor or the borrower is financially capable to meet the obligations. It is an
evaluation made by credit bureaus of a borrower’s overall credit history. Typically, a credit
rating tells a lender or investor the probability of the subject being able to pay back a loan.
Investors, issuers, investment banks, broker-dealers, and governments use credit ratings. For
investors, credit rating agencies increase the range of investment alternatives and provide
independent, easy-to-use measurements of relative credit risk; this generally increases the
efficiency of the market, lowering costs for both borrowers and lenders. Since Bangladesh has
many companies such as corporate, banks, NBFIs so rating is must to see the credit
worthiness of these companies. It is a growing sector in Bangladesh now.

1.2 Origin of the Report

Here, I am assigned to complete this term paper as the requirement of our Bachelor of
Business Administration program at Premier University, which will be submitted, to our
respectable Instructor Ms. Nilufar Sultana, Assistant Professor, Premier University, to
gather knowledge and experience.

1.3 Background of the Report

Credit Rating Agencies is the important industry for our financial institutions as well as our
country because of their Rating analysis. Now days this sector is popular through the world.
Every business organization must have to take credit rating that has at least one corner of
long-term loan from the financial institute in Bangladesh.
1.4 Scope of the Report
Any academic course of the study has a great value when it has practical application in real
life. Only a lot of theoretical knowledge will have little importance unless it is applicable in
the practical life. Therefore, we need proper application of our knowledge to get some benefit
from our theoretical knowledge in our practical life. Term paper implies the full application of
the methods and procedures by acquiring knowledge of the subject matter which can be
fruitfully applied in our daily life.

1.5 Objectives of Study

The key objectives of the report are as follows:
 To know the about the Credit rating process and its benefits in the context of Bangladesh.
 Identify the problems and prospects of credit rating in the context of Bangladesh.
 To acquire depth knowledge about whole process of the credit rating.

1.6 Methodology of the Report

The nature of the report is descriptive. The required information was collected from my
personal observation at Credit Rating Agency of Bangladesh Limited, conversation with
colleagues and the theoretical knowledge that I have learned from BBA program. This report
was based on primary and secondary data. I have collected data by the following ways:

 From the organization manuals and websites.

 Internet.
 By talking with organization‟s officials time to time.
 Observation method also used to prepare this report.
 CHAPTER: 2

2.1 What is Credit Rating?

A credit rating evaluates the credit worthiness of a debtor, especially a business (company) or
a government. It is an evaluation made by a credit rating agency of the debtor's ability to pay
back the debt and the likelihood of default. Credit ratings are determined by credit ratings
agencies. The credit rating represents the credit rating agency's evaluation of qualitative and
quantitative information for a company or government; including non-public information
obtained by the credit rating agencies analysts. Credit ratings are not based on mathematical
formulas. Instead, credit rating agencies use their judgment and experience in determining
what public and private information should be considered in giving a rating to a particular
company or government. The credit rating is used by individuals and entities that purchase the
bonds issued by companies and governments to determine the likelihood that the government
will pay its bond obligations. A poor credit rating indicates a credit rating agency's opinion
that the company or government has a high risk of defaulting, based on the agency's analysis
of the entity's history and analysis of long term economic prospects.

2.2 History of Credit Rating

The three renowned rating companies of today‘s world are Fitch Ratings, Moody‘s and
Standard & Poor (S&P). The history of credit rating is similar to the history of forming and
adopting credit rating services by these companies.

John Knowles Fitch founded the Fitch Publishing Company in 1913. Fitch published
financial statistics for use in the investment industry via "The Fitch Stock and Bond Manual"
and "The Fitch Bond Book." In 1924, Fitch introduced the AAA through D rating system that
has become the basis for ratings throughout the industry. With plans to become a full-service
global rating agency, in the late 1990s Fitch merged with IBCA of London, subsidiary of
Fimalac, S.A., a French holding company. Fitch also acquired market competitors Thomson
BankWatch and Duff & Phelps Credit Ratings Co. Beginning in 2004, Fitch Ratings began to
develop operating subsidiaries specializing in enterprise risk management, data services and
finance industry training with the acquisition of Canadian company, Algorithmic, and the
creation of Fitch Solutions and Fitch Training. (For information bond ratings systems see
Bond Ratings Agencies: Can You Trust Them.)

John Moody and Company first published "Moody's Manual" in 1900. The manual published
basic statistics and general information about stocks and bonds of various industries. From
1903 until the stock market crash of 1907, "Moody's Manual" was a national publication. In
1909 Moody began publishing "Moody's Analyses of Railroad Investments", which added
analytical information about the value of securities. Expanding this idea led to the 1914
creation of Moody‘s Investors Service, which, in the following 10 years, would provide
ratings for nearly all of the government bond markets at the time. By the 1970s Moody's
began rating commercial paper and bank deposits, becoming the full-scale rating agency.
Moody's ratings represent the opinion of Moody's Investors Service as to the relative
creditworthiness of securities. As such, they should be used in conjunction with the
descriptions and statistics appearing in Moody's publications. Reference should be made to
these statements for information regarding the issuer. Moody's ratings are not commercial
credit ratings. In no case is default or receivership to be imputed unless expressly stated.
Henry Varnum Poor first published the "History of Railroads and Canals in the United States"
in 1860, the forerunner of securities analysis and reporting to be developed over the next
century. Standard Statistics formed in 1906, which published corporate bond, sovereign debt
and municipal bond ratings. Standard Statistics merged with Poor's Publishing in 1941 to form
Standard and Poor's Corporation, which was acquired by The McGraw-Hill Companies, Inc.
in 1966. Standard and Poor's has become best known by indexes such as the S&P 500, a stock
market index that is both a tool for investor analysis and decision making, and a U.S.
economic indicator.

2.3 Credit Rating in Bangladesh

Bangladesh credit rating industry started its journey with the mandatory requirement of
having credit rating for all public debt instruments, right offer issues and shares issued at a
premium before the same were offered to the public. In the year of 2002, Credit Rating
Information & Service Limited (CRISL) started its operation as the first registered credit
rating agency of Bangladesh. The second rating agency, Credit Rating Agency of Bangladesh
Limited (CRAB) went to its operation on 2004, thus, making the sustainability more difficult
for two rating agencies. Credit Risk Grading Manual of Bangladesh Bank was circulated by
Bangladesh Bank vide BRPD Circular No. 18 dated December 11, 2005 on Implementation of
Credit Risk Grading Manual which is primarily in use for assessing the credit risk grading
before a bank lend to its borrowing clients. By that time CRISL rating reports were appearing
to be very useful for the users; specially CRISL rating report on the then Al Baraka Bank
convinced the Bangladesh Bank of the need of credit rating and it took the initiative to make
mandatory for all banks to have credit rating before it goes for public offering. The banking
regulator further decided to make it mandatory for all banks to submit credit rating reports to
the regulator within six months after the finalization of accounts. Following the example of
the central bank, the insurance regulator also came up with the requirement to make rating
mandatory for all general insurance companies every year and for the life insurance
companies bi-annually. The Dhaka Stock Exchange, while issuing the direct listing
regulations, made the credit rating mandatory before a company apply for direct listing. The
above regulations created an enabling environment for credit rating in the country‘s capital
and financial markets.

The concept of client rating by the rating agencies to support capital adequacy of the banks
came up in view of the need for implementation of Basel II capital adequacy framework by
Bangladesh Bank. According to Basel II framework, BB adopted a standardized approach for
credit risk in which the services of rating agencies were required under certain strict terms and
conditions. Bank client rating is a very sensitive issue in view of the fact that most of the
private sector companies, enjoying banking facilities, are not maintaining standard financials
for appropriate evaluation. Unless and until all the above factors are properly evaluated
through sector wise studies, the ratings are bound to give wrong signals. Security and
Exchange Commission of Bangladesh (SECB) allows 2% default rate of the credit rating
agencies. There are certain penalties in case default rate of more than 2% including
cancellation of license of the defaulter rating agency as the highest penalty by SECB. Other
credit rating companies National Credit Ratings Ltd and Emerging Credit Rating Ltd started
their journey on 2010. ARGUS Credit Rating Services Ltd. is on operation since 2011. Lastly,
new four credit rating companies have come to operation on 2012 which are WASO Credit
Rating Company (BD) Limited, Alpha Credit Rating Limited, The Bangladesh Rating Agency
Limited and WASO Credit Rating Company (BD) Limited. A list of credit rating companies
operating in Bangladesh is attached with the report as Appendix. According to Association of
Credit Rating Agencies of Asia, Bangladesh has the highest number of credit rating
companies. India; one of the largest economy of Asia has only two credit rating companies.
On the other hand China, another largest economy is continuing its economic growth with a
single credit rating company. The rating industry In Bangladesh is now considered to be a
parentless industry. The behavior of the regulators towards nourishing this industry does not
appear to be rational. The rating agencies are still defined by the SEC rules as an investment
advisory company. This has not changed over a long time. The paid-up capital still remains at
Tk. 5.0 million (50 lakh), to start a rating agency by any group of sponsors.

2.4 Top 10 Credit Rating Agencies of the world

Here is the list of Top 10 Credit Rating Agencies of the world. These agencies are Nationally
Recognized Statistical Rating Organizations by the U.S. Securities and Exchange Commission.

MOODY’S : Moody‘s is the oldest credit rating agency. It is also the first rating agency to be
recognized by NRSRO in 1975. The company became public in 2000. It has been earning
huge profits. Average profit margin was 53% from 2000 to 2007. Structured finance products
were its top source of revenue by 2000.

Standard & Poor’s : The agency is owned by Mc Graw-Hill Inc. It has been published any
stock indices of the world, most famous being S&P 500 index which is the most watched
index in the world. McGraw-Hill reported a net profit margin of 12.6 percent for 2008.

Fitch : Fitch is smallest among the top three agencies. It is a part of Fitch Group, a subsidiary
of Fimalac S.A FIM.PA. Was the third agency to become an NRSRO in 1975. From 1975 to
1992, four other agencies were recognized as NRSROs and all subsequently merged with
Fitch.

DBRS : DBRS is privately owned Canadian ratings agency. Has been the top ratings agency
in Canada for 30 years. It became the fourth NRSRO in 2003. DBRS believes that it can
compete with the big three but is not favored by authorities.

Egan-Jones : Egan-Jones is a Philadelphia-based agency founded in 1995. It was granted

NRSRO status in December 2007 after a nine-year process. Although they are paid by
investor-subscribers, Egan-Jones will give out their ratings to anyone who asks.

A.M Best : A.M Best was founded in 1899 in New York City and became an NRSRO in 2005.
It specializes exclusively on the insurance marketplace and so not a competitor with the others
per se. But has recently begun issuing debt and financial-strange ratings for small and mid-
sized commercial banks.

Japan Credit Rating Agency Limited : Japan Credit rating Agency was established in 1985
and based in Tokyo and it became anNRSRO in 2007. It is a small agency when compared to
competitors. it has a staff of just 90.
Rating and Investment Information Inc : The second Japanese credit ratings agency to
become an NRSRO in 2007. It was set up in 1975, now based in Nihonbashi. New York
office was set up in 2005.

LACE Financial : It was founded in 1984, and became a NRSRO in 2008. The second
NRSRO after Egan-Jones to operate on investor-paid business model.

Realpoint LLC : Realpoint LLC became a NRSRO in 2008. It is one of the smallest
NRSROs and is paid by issuers. Obtained an exemption in 2008 from the SEC regulation that
an NRSRO is prohibited from rating an issuer that contributes 10 percent or more of its
revenue.

2.5 Rating Companies in Bangladesh

List of Credit Rating Companies in Bangladesh:

SL. Name of the Company Date of Issuance of

No. Registration Certificate
01. Credit Rating Information and Services Ltd (CRISL) 21-08-2002
02. Credit Rating Agency of Bangladesh Ltd (CRAB) 24-10-2004
03 National Credit Ratings Ltd 22-06-2010
04 Emerging Credit Rating Ltd 22-06-2012
05 ARGUS Credit Rating Services Ltd. 21-07-2011
06. WASO Credit Rating Company (BD) Limited 15-02-2012
07. Alpha Credit Rating Limited 20-02-2012
08. The Bangladesh Rating Agency Limited 07-03-2012

 Credit Rating Information and Services Limited

Credit Rating Information and Services Limited is a company that started its journey to
implement a Concept in Bangladesh – “Credit Rating”. Before CRISL, “Credit Rating” was
text paper words for the teachers and students of Bangladesh. The voyage of how CRISL
conceptualized this idea in 1995, implemented it in Bangladesh, and finally achieved its
operating license in 2002 – after almost eight years of struggle – has a long, interesting,
exciting and painful history. CRISL is now the national flagship company representing the
profession at home and abroad.
 Credit Rating Agency of Bangladesh:
Credit Rating Agency of Bangladesh Ltd. (CRAB) was established in 2003 at the initiative of
some leading personalities in private sector and institutions of the country with the
commitment to contribute to the development of the capital market by providing quality
ratings and comprehensive research services. CRAB was incorporated as a public limited
company in 2003 and was granted license by the Bangladesh Securities & Exchange
Commission (BSEC) in 20018. Within short span of time, CRAB has established its
reputation as a reliable source of independent opinion on risks based on systematic and
standardized analysis done by professionals. Credit Rating Agency of Bangladesh Ltd (CRAB)
is committed to providing the financial markets with reliable, timely and prospective credit
opinions. Built on a foundation of standardized approach in credit rating incorporating
international best practices and local dynamics, CRAB is recognized around the country and
across all industrial sectors as a market leader in credit ratings and research.

 National Credit Ratings Ltd:

National Credit Ratings Limited (NCR) is a full service rating company that offers a wide
range of services. Incorporated as a public company, NCR started its business with a paid up
capital of TK 10.00 million. The Securities and Exchange Commission granted the license to
NCR in June 2010 under the Credit Rating Companies Rules 1996.The Company is
recognized by the Bangladesh Bank as an External Credit Assessment Institution (ECAI).

 Emerging Credit Rating Ltd (ECRL)

Emerging Credit Rating Limited (hereinafter referred to as ECRL) began its journey in the
year 2009 with the motive to deliver credible superior & quality credit rating opinion in
various industry segments around Bangladesh. ECRL obtained credit rating license from
Bangladesh Securities and Exchange Commission (BSEC) in June 2010 as per Credit Rating
Companies Rules 1996 and received Bangladesh Bank Recognition as an External Credit
Rating Institution (ECAI) in October 2010. ECRL also established technical collaboration
with Malaysian Credit Rating Company named Malaysian Rating Corporation Berhad
(MARC). Our drive to deliver the promised quality has helped ECRL complete 18,900 rating
assignments from the time of inception to December 31, 2015.

 ARGUS Credit Rating Services Ltd

ARGUS Credit Rating Services Ltd. (ACRSL) is the next-generation Credit Rating Agency of
Bangladesh. Founded as a joint venture between global experts in credit & equity research and local
sponsors with strong capital markets track record, ACRSL received its license from the SEC in 2011.
ACRSL is partnered with DP Information Group (“DP”), the premier credit rating agency of Singapore
for over 30 years. Having pioneered credit rating in Singapore, DP has played an influential role in the
development of the credit rating sector in China, Indonesia, and Philippines. Further, DP’s parent
company, the UK based Experian Group is one of the world’s top credit reference agencies.

 WASO Credit Rating Company (BD) Limited:

WASO Credit Rating Company (BD) Ltd. (“WCRCL”) was incorporated as a public limited company
under the Office of the Registrar of Joint Stock Companies and Firms in July of 2009. With the license
from the Securities & Exchange Commission (SEC) of Bangladesh to operate as a credit rating
company, WCRCL has officially started its journey on 15th February, 2012. It has also been
recognized as an External Credit Assessment Institution (ECAI) by Central Bank of Bangladesh in
October of 2012. WCRCL is independent and transparent in its operations and eligible to rate Banks
and FIs, PSEs, Insurance, Corporate and Debt Instruments. The WCRCL team is formed with
experienced professionals and specialists from different disciplines with the highest levels of ethics
and integrity. WASO Credit Rating Company (BD) Ltd. has executed an agreement for foreign
partnership with Financial Intelligence Services Ltd (FISL). Through this partnership with FISL,
WCRCL has created bondage with the global resources hub, thus being able to provide the best judged
opinion through rating services to the nation.

 Alpha Credit Rating Limited:

Alpha Rating was incorporated on 218 February 2011, a result of the initiative of a few
distinguished and renowned professionals of Bangladesh and with the support and
organizational assistance from SATCOM IT Ltd., Axis Resources Ltd., Equity Care
Bangladesh Ltd., and TAN Equity and Investment Ltd.
Istanbul International Rating Services Inc. (Turk Rating) is a Turkish credit rating agency. It
is one of the three rating agencies to receive accreditation from the Republic of Turkey’s
Banking Regulatory and Supervisory Agency (BRSA) and the Capital Markets Board. A
group of international experts with extraordinary depth and breadth of experience in ratings,
investor services, banking, regulatory, and other industry sectors established the agency in
Turkey.
 The Bangladesh Rating Agency Limited:
The Bangladesh Rating Agency Limited (BDRAL), a sectors in Bangladesh. The company
launched its SME ratings in Bangladesh following a successful pilot phase carried out in the
year 2009 under the name Dun & Bradstreet Rating Agency Bangladesh Limited, which was
later renamed. Having congruence with the mentioned pragmatic approach, BDRAL SME
ratings aim to address the challenges faced by banks and other lending institutions in SME
lending and took the initiative to assist the financiers to provide a comfort level for increasing
the financing in the SME sector. The only Credit Rating Agency for Small and Medium
Enterprises (SMEs) licensed by Bangladesh Securities and Exchange Commission (BSEC)
and approved by Bangladesh Bank

2.6 Recent developments

Since the beginning of the credit crunch in early 2007 rating agencies have come under fire
for their high ratings of mortgage backed securities (MBS) that did not reflect the financial
stability of the borrowers. This has also reopened a discussion whether rating agencies, which
get paid by borrowers for their rating, are not in a conflict of interest.

2.7 Rating Grades

Each rating agency has developed its own system of rating sovereign and corporate borrowers.
Fitch Ratings developed a rating system in 1924 that was adopted by Standard & Poor's.
Moody's grading is slightly different. Moody's sometimes argues that their ratings embed a
conceptually superior approach that directly considers not only the likelihood of default but
also the severity of loss in the event of default.

Description Moody's S&P Fitch

Maximum Safety Aaa AAA AAA
High grade Aa1 AA+ AA+

High grade Aa2 AA AA

High grade Aa3 AA AA-

Higher medium Grade A1 A+ A+

Higher medium Grade A2 A A

Higher medium Grade A3 A A-

Lower medium Grade Baa1 BBB+ BBB+

Lower medium Grade Baa2 BBB BBB

Lower medium Grade Baa3 BBB BBB-

Speculative Ba1 BB+ BB+

Speculative Ba2 BB BB

Speculative Ba3 BB BB-

Highly Speculative B1 B+

Highly Speculative B2 B B
Highly Speculative B3 B-
Substantially risky CCC+ CCC+
 Substantially risky Caa CCC CCC

May be in default Ca CC CC
Extremely Speculative C C C

2.8 The Importance of Credit Rating Agencies

Credit rating agencies provide investors and debtors with important information regarding the
creditworthiness of an individual, corporation, agency or even a sovereign government. The
credit rating agencies help measure the quantitative and qualitative risks of these entities and
allow investors to make wiser decisions by benefiting from the skills of professional risk
assessment carried out by these agencies. The quantitative risk analysis carried out by credit
rating agencies include comparison of certain financial ratios with chosen benchmarks and the
qualitative analysis focuses on the management character, legal, political and economic
environment in a jurisdiction.

2.9 Development of Financial Markets

Credit rating agencies help provide risk measures for various entities and make it easier for
financial market participants to assess and understand the credit risk of the parties involved in
the investing process. Individuals can get a credit score in order to be eligible for easy access
to credit cards and other loans. Institutions can borrow money easily from banks without
having to go through lengthy evaluations from each individual lender separately. Also
corporations and governments can issue debt in the form of corporate bonds and treasuries to
attract investors based on the credit ratings.

2.10 Credit Rating Agencies Help Regulate Financial Markets

The credit ratings provided by popular rating agencies including Moody‘s, Standard & Poor‘s
and Fitch, have become a benchmark for regulation of financial markets. Legal policies
require certain institutions to hold investment graded bonds. Bonds are classified to be
investment graded based on their ratings by these agencies, any corporate bond with a rating
higher than BBB is considered to be investment graded bond.

2.11 Estimation of Risk Premiums

The credit ratings provided by these agencies are used by various banks and financial
institutions in determining the risk premium they will charge on loans and corporate bonds. A
poor credit rating implies a higher risk premium with an increase in the interest rate charged
to corporations and individuals with a poor credit rating. Issuers with a good credit rating are
able to raise funds at a lower interest rate.

2.12 Enhanced Transparency in the Credit Markets

The credit rating agencies provide improved efficiency in the credit markets and allow for
more transparency in dealings. The ratings help monitor the credit soundness of various
borrowers through a set of well-defined rules.

2.13 Standardization of the Evaluation Process

Most credit agencies use their own methodology for determining credit ratings, but since only
a handful of popular credit rating providers exist, this adds a great deal of standardization in
the rating process. The credit ratings of different borrowers can be easily compared using
ratings provided by a credit rating company and the applications can be easily sorted.

2.14 Limitations of Credit Rating

Some limitations of credit rating are:
Rating could be biased depending on the relationship between the credit rating agency and
rated company. The "Big Three" global credit rating agencies--U.S.Based Standard and
Poor's, Moody's, and Fitch Ratings--have been under intense scrutiny since the 2007-2009
global financial crises. They were initially criticized for their favorable pre-crisis ratings
of insolvent financial institutions like Lehman Brothers, as well as risky mortgage-related
securities that contributed to the collapse of the U.S economy.

Credit rating requires a fine knowledge about the rated company. Analyst needs to know
about the company, its operation properly which is time consuming and requires a very
good effort. Several meetings and conversations over phone are done to ensure that. Once
a company is rated by a financial analyst of a credit rating agency and after that if that
financial analyst switches his/ her job, new analyst faces a lot of troubles while performing
surveillance of the company.

As ratings are designed exclusively for the purpose of grading obligations according to
their credit quality, they should not be used alone as a basis for investment operations. For
example, they have no value in forecasting the direction of future trends of market price.
Market price movements in bonds are influenced not only by the credit quality of
individual issues but also by changes in money rates and general economic trends, as well
 as by the length of maturity, etc.

2.15 Types of Credit Ratings

A. National Ratings: National Ratings measure the credit worthiness of issuers or issues
relative to all other issuers or issues within the same country, and unlike CI's other ratings
are not intended to be comparable across countries. National Ratings are used in countries
whose sovereign credit ratings are some way below 'AAA' on CI's international ratings
scales, and where there is enough demand from capital market participants for such ratings.
National Ratings enable the ratings of function in each country to be deal out across a
solid rating scale (from 'AAA' to 'D'), thereby permitting large credit differentiation than
may be possible under internationally corresponding rating scales.

B. International Ratings: Issuer for CR (for governments, financial and corporate institutions)
sum up an entity's overall creditworthiness. Its capacity and willingness come to meet its
financial illness as they present due across international borders. Different sectors of ratings
that may be assigned are given below.
I. Sovereign credit ratings: A sovereign credit rating is the CR of a sovereign
entity, for government. The sovereign credit rating indicates only the risk level
of the investing conditions of a country and it is used by investors who looking to
invest on abroad. It usually takes for political risk into account.

II. Banks and other Financial Institutions:

Long and short-term local currency ratings
Long and short-term foreign currency ratings
Financial strength ratings (It's an opinion of stand-alone financial health)
Support ratings (For an assessment of a bank, it would receive external support
in case of financial problems)

III. Corporate:
Long-and short-term local currency ratings
Long-and short-term foreign currency ratings.

IV. Issue Credit Ratings: Bonds, Shares and other financial instruments are the
options of an individual entity's ability and willingness to respect its financial
 obligations with acclaim to a specific bond or to other debt instruments. The
ratings assigned to the debt issues of financial institutions and corporate can be
either short-term or long-term, depending on the tenor of the financial obligation.
A short-term rating is allocated to debt instruments with a maturity date of up to
one year.

2.16. Who are the Regulators?

In Bangladesh, there are three regulators for the credit rating company. They always regulate
the credit rating company in Bangladesh. Every sector can regulate credit rating agency if they
feel needed. The three regulators regulation for credit rating agency is:

Bangladesh Security & Exchange Commission (BSEC):

BSEC is the authority to issue license and quarterly monitoring of Credit Rating Agencies, it
oversees the compliance requirement and rules laid down by Credit Rating Companies Rules
1996. BSEC is the regulator of the country’s capital market, enacted through the Securities
and Exchange Commission Act 1993. In accordance to BSEC Rules 20018, every public
offering of debt instruments, shares at premium and right share issued at premium are to be
rated by an External Credit Rating Institution (ECAI).

Bangladesh Bank:

Bangladesh Bank is also regulating Credit Rating Companies through different circular,
Circular Letters, Regulation and Guidelines, Governor's Speeches, policies etc.
Implementation and guidelines for Basel II of Capital Adequacy and Risk Management, Risk
based Capital Adequacy for Bank, supervisory review evaluation process, Mapping of
External Credit Assessment Institutions (ECAIs) rating scales with Bangladesh Bank (BB)
rating Grade, Implementation of Basel-III in Bangladesh, and mapping of SME Rating Scales
of the External Credit Assessment Institutions (ECAIs) with Bangladesh Bank's SME Rating
Grades. Lastly, they audit Credit Rating Company whether the companies follow the CRA
guideline or not.

Insurance Development & Regulatory Authority Bangladesh:

IDRA’s mission is to make the insurance industry the premier financial service provider in the
country and as per Bangladesh Bank is circular, every life and general insurance company
needs to prepare credit rating reports with validity of one year.
2.17 Requirements for the Credit rating in Bangladesh
1. The Credit Rating Agencies Instructions 1996 issued by the Securities & Exchange
Commission requires that the following instruments be rated prior to making issuance and that
the information on rating be incorporated in the prospectus of offer documents:

 Public donations of all debt instruments: bond, debenture, commercial paper,

structured finance (asset/mortgage backed securities) and preference shares.

 Public issue of shares at a premium.

2. SEC through its Securities and Exchange (Rights Issue) law, from 2006 it requires the
rating of the followings:
 All rights issue at Premium.

3. The SEC rules in 2004 require the rating of an asset pools to be securitized with optional
requirements of credit of the originator.

4. Bangladesh Bank through the circulars which requires a mandatory rating for the
followings:
 All scheduled Banks on an annual basis.

 All financial institutes in the case of IPO.

 Bank exposures.

5. Chief Controller of Insurance requires originally CR for the following issues:

 All general insurance companies on an annual basis

 All life insurance companies on a biennial basis.

2.18 Regulatory framework for domestic credit rating agencies in Bangladesh

Domestic CRAs in Bangladesh are operating within a regulatory framework put in place and
monitored closely by the SECB. The framework is defined by a set of rulings that came into
play at various points in time. Bangladesh Securities and Exchange Commission (BSEC) has
been one of the prime regulators for CRA, along with the authority to issue license and
quarterly monitoring of CRA‟s, it also oversees the compliance requirement and rules laid
down by Credit Rating Companies Rules 1996.

2.19 Credit Rating Companies Rules 1996

The Credit Rating Companies Rules issued by SECB in 1996 created the umbrella of
provisions under which the business of credit rating companies in Bangladesh is regulated,
monitored, and controlled. The CRC Rules 1996 provided in Section 3, “Requirement of
Credit rating: No issue of debt security or public issue of shares (including right share) at a
premium shall be made by an issuer unless the issue is rated by a credit rating company and
declaration of such rating is given in the prospectus or Right share offer document. This made
it mandatory for
 All bonds, either public issues or private placements;
 Issue of shares (equity) at premium in the capital market and
 Any right offer of shares at premium to be rated.

In line with the regulation, 93 issues were enlisted with the stock exchanges through initial
public offerings (IPOs) between 2004 and 2013. Credit Rating Agency of Bangladesh (CRAB)
rated 49 issues, CRISL rated 36 issues, and the remaining 8 issues did not have any ratings.
Five the trend shows that an average of 8–10 issues would come under purview of rating in a
bid to comply with the regulation. .

2.20 Banking Regulation and Policy Department Bangladesh Bank

(Circular Number 05, Dated 29 May 2004 and Circular Number 06, Dated 13 March 2011)

Bangladesh Bank‟s Banking Regulation and Policy Department (BRPD) issued a circular on
29 May 2004 to all unlisted banking companies to get them rated before they proceeded for
IPO. The banks that were waiting to go public at that time did opt for the rating exercise
before proceeding. Six banks namely, BRAC Bank, Jamuna Bank, Trust Bank, the Premier
Bank, Shahjalal Islami Bank, and First Security Islami Bank, were listed in the exchange
through IPO. Three of these were rated by CRAB and the rest by CRISL. In 2013, Bangladesh
Bank granted eight more banking licenses. Rating agencies forecast that in the near future
these eight banks may also be brought under the purview of annual rating.

The Insurance Development and Regulatory Authority (IDRA) is the primary regulator of
insurance companies in Bangladesh. Nevertheless, another circular issued by Bangladesh
Bank, BRPD 06 dated 13 March 2011, made it mandatory for general insurance companies to
get themselves rated. Through the circular, all banks were instructed to consider the rating of
general insurance companies instead of the relationship-based enlistment of eligible insurance
companies to provide insurance/cover note to the bank clients.
2.21 Insurance Development and Regulatory Authority (IDRA):
The Insurance Development and Regulatory Authority (IDRA) is the primary regulator of
insurance companies in Bangladesh. Nevertheless, another circular issued by Bangladesh
Bank, BRPD 06 dated 13 March 2011, made it mandatory for general insurance companies to
get themselves rated. Through the circular, all banks were instructed to consider the rating of
general insurance companies instead of the relationship-based enlistment of eligible insurance
companies to provide insurance/cover note to the bank clients. For credit rating assessment of
insurance companies, the respective regulatory authority is Insurance Development and
Regulatory Authority Bangladesh (IDRA). To perform credit assessment, credit rating
companies can be recognized as a Credit Rating Institution by IDRA. Circular of Chief
Controller of Insurance No. 21/21/98-376 dated 27 March 2007 requires all general insurance
companies to get credit rating assessment once a year and all life insurance companies to get
credit rating assessment every two years. Further to that, a circular issued by Banking
Regulation and Policy Department (BRPD) No. 06, dated March 13, 2011 also made it
mandatory for general insurance companies to get credit rating assessment.

2.22 Credit rating and standardized approach to credit risk in BASEL II

Basel II is an international business standard that requires financial institutions to maintain
enough cash reserves to cover risks incurred by operations. The Basel accords are a series of
recommendations on banking laws and regulations issued by the Basel Committee on Banking
Supervision (BSBS). The financial sector of Bangladesh is now considered to be the most
regulated sector compared to other sectors. Currently 56 banks are now in operation in a small
economy like Bangladesh. Consequently, the financial institutions have been facing tough
competition in grabbing market share. Bank for International Settlement (BIS) has issued
Basel-II Capital Accord, which is in the process of implementation globally. Under this
framework, capital adequacy will be determined in either in
 Standardized Approach (The standardized approach uses external ratings such as those
provided by ECAI to determine risk-weights for capital charges) or
 Internal Rating Based Approach: IRB allows banks to develop their own internal ratings for
risk-weighting purposes subject to the meeting of specific criteria and supervisory approval.

Most of the developed and developing countries even our neighboring countries have already
taken initiatives to implement Basel-II since the beginning of 2007. Realizing the importance,
Bangladesh Bank has already declared time framework for the parallel run of Basel-II
exercise along with BASEL I from the beginning of the year 2009. CRAs‟ role has expanded
with financial globalization and has received an additional boost from Basel II which
incorporates the ratings of CRAs into the rules for setting weights for credit risk. Bangladesh
Bank (BB) is the central bank of Bangladesh and governs all the active performing
commercial banks in the country. Considering the persistent complexity and diversity in the
banking industry and to make the bank’s capital more risk sensitive and shock absorbent,
Bangladesh Bank has introduced Risk Based Capital Adequacy guideline relating to the Basel
II Accord. In compliance to international standards Bangladesh Bank has made the guidelines
statutory for all scheduled banks in Bangladesh from January 01, 2010. Basel II attempts to
integrate Basel capital standards with national regulations, by setting the lowest capital
requirements of financial institutions with the goal of ensuring organization or Institution
liquidity.

In the aftermath of the global financial crisis of 2008-2009, the Basel Committee of Banking
Supervision (BCBS) substantially reformed the existing capital adequacy guidelines to new
framework referred as Basel III with objectives.
 to strengthen global capital & liquidity rules with the goal of promoting a more
resilient banking sector.
 to improve the banking sector’s ability to absorb shocks arising from financial &
economic stress.