Regulatory Framework and Role of Domestic Credit Rating Agencies in Bangladesh

Abstract

The Securities and Exchange Commission 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 (DCRAs) were licensed by SECB after 2002, which were later accorded status of external credit assessment institutions (ECAIs) by Bangladesh Bank. Thereafter, SECB and Bangladesh Bank issued rules and regulations towards 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, DCRAs 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 ECAI status to more DCRAs, banking sector financing to corporate borrowers is receiving a boost. The number of DCRAs 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 SME ratings apart from the usual bank loan ratings. Access to adequate financing is still a chronic problem for SMEs in the Asian region and here, credit ratings could fill a critical gap in the credit information continuum, moving away from collateral-based lending to risk-based lending.