Bank Loan/Client Rating - Credit Rating Agency of Bangladesh

Bank Loan/Client Rating
Proposal for Loan/Client Rating Service
ABOUT CRAB
Credit Rating
Agency of
Bangladesh Ltd
Sena Kalyan Bhaban,
Suite No: 403, Flr: 4th
195 Motijheel C/A.
Dhaka 1000
Phone: 9571238,
9571497, 9553254,
Fax: (8802)9563837
Email
crab@intechworld.net
info@crab.com.bd
Web
www.crab.com.bd
Contact
H S Sohrawardhi
Vice President
01713032807
hss@crab.com.bd
Credit Rating Agency of Bangladesh Limited (CRAB) was set up in 2003 by
leading financial/investment institutions and individuals as an independent and
professional full service Credit Rating Agency. ICRA Ltd, India subsidiary of
international Credit Rating Agency Moody's Investors Service, USA is the
technical partner of CRAB. CRAB is a Public Limited Company.
Mr. M. Syeduzzaman, former Finance Minister, is the Chairman of the
Company. Mr. Md. Matiul Islam, former Finance Secretary is the Vice
Chairman. Among the Directors are Mr. Samson H Chowdhury, Mr. Syed
Manzur Elahi, Mr. Anis-Ud-Dowla, Mr. A K M Rafiqul Islam, Mr. M. Haider
Chowdhury, Mr. ASM Quasem, Mr. M. Faizur Rahman etc.
Mr. Hamidul Huq, former MD of United Commercial Bank Ltd is the Managing
Director of CRAB. He is aided by a pool of experienced and trained
professionals.
CRAB’s ratings are awarded by an independent rating committee comprising of
former Deputy Governors of Bangladesh Bank, former Comptroller & Auditor
Generals, noted economists, former Chairman of Securities & Exchange
Commission, Islami Bank specialist etc.
CRAB has conducted more than 200 credit rating assignments in various
industrial and business sectors and is presently the leading credit rating agency
of the country.
ECAI Status
In April 2009, Bangladesh Bank accredited Credit Rating Agency of Bangladesh
Ltd as an External Credit Assessment Institution (ECAI). Under the
standardized approach for calculating risk weighted assets against credit risk, the
credit rating is to be determined on the basis of risk profile assessed by the
ECAIs. Banks will use the ratings of the ECAIs and corresponding risk weight for
calculating RWA for credit risk under the standardized approach.
Mapping of CRAB with BB risk grade
BB rating grade
Equivalent rating of CRAB
1 AAA
2 AA1, AA2
3 AA3, A1, A2, A3
4 BBB1, BBB2, BBB3
5 BB1, BB2, BB3, B1, B2, B3, CCC1, CCC2
6 CCC3, CC, C, D
Short Term Rating
S1
ST-1
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Bank Loan/Client Rating
S2
S3
S4
S5
S6
ST-2
ST-3
ST-4
ST-5
ST-6
Bank Loan Rating
CRAB offers Bank Loan Ratings to various types of facilities provided by banks, such as
working capital demand loans, cash credit, project loans, loans for general corporate
purposes, and non-fund-based facilities. Bank loan ratings indicate the degree of risk with
regard to timely payment of interest and principal on the facility being rated.
Bangladesh Bank (BB) issued new guidelines on capital adequacy for banks. These guidelines
require banks to link the minimum size of their capital to the credit risk in their portfolios.
This is a departure from the present framework, under which banks calculate the minimum
size of their capital as a proportion of the entire loan portfolio, regardless of the degree of
credit risk. To determine credit risk in their loan portfolios, banks will need to use credit
ratings assigned by approved External Credit Assessment Institutions (ECAIs) such as CRAB.
The Bank Loan Rating service from CRAB entails evaluating the capability of an issuer
(borrower of a bank) to timely meet its debt obligations against a specific line of credit,
in the light of the relevant terms, conditions and covenants. CRAB considers all relevant
factors that have a bearing on the future cash generation and debt servicing ability of the
issuer.
These factors include:
• Industry characteristics & regulations
• Competitive position of the issuer
• Operational efficiency
• Management quality
• Commitment to new projects
• Securities and relationship
• Strength of associate companies
• Funding policies of the issuer
A detailed analysis of past financial statements is made to assess performance under “real
world” business dynamics. Estimates of future earnings over the next three to five years
under various sensitivity scenarios are drawn up and evaluated against the claims and
obligations that would require servicing. Primarily, it is the relative comfort on the level
and quality of the issuer’s cash flows to service obligations that determines its rating.
Bank Client Rating
CRAB also offers entity ratings of different companies. CRAB has conducted more than
hundred companies of different industries, including textile, telecom, engineering, agro
processing, power, manufacturing, and service sector. The rating considers the overall
position and credibility of an entity through analysis of the following factors:
• Industry risk analysis
• Business risk analysis
• Operating environment
• Financial Strength & Policies
• Management
• Corporate governance
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Bank Loan/Client Rating
• Operating performance
• Securities & Relationship risks
About Basel II
Basel II is recommendatory framework for banking supervision, issued by the Basel
Committee on Banking Supervision in June 2004. The objective of Basel II is to bring about
international convergence of capital measurement and standards in the banking system. The
Basel Committee members who finalised the provisions are primarily representatives from
the G10 countries, but several countries that are not represented on the committee have
also stated their intent to adopt this framework.
BB, in December 2008, has issued guidelines on the New Capital Adequacy Framework
(BRPD Circular 09, dated 31.12.08) to banks operating in Bangladesh, based on the Basel II
framework. These guidelines inform that BB suggests implementation of Basel II with the
following approaches:
i) standardised approach for calculating RWA against credit risk
ii) standardised approach for calculating RWA against Market Risk; and
iii) Basic indicator approach for calculating RWA against Operational Risk
Under the standardised approach for measuring credit risks, the risk grades are determined
on the basis of ratings assigned by the ECAIs.
Risk Weights of Corporate Claims under Basel II
CLAIMS ON
CORPORATE
(excluding equity
exposures)
Bangladesh Bank
Rating Grade
Equivalent
CRAB Rating
Risk Weight
1 AAA 20
2 AA1, AA2 50
3,4 AA3, A1, A2, A3, 100
BBB1, BBB2, BBB3
5,6 BB1, BB2, BB3, B1, B2,
B3, CCC1, CCC2
CCC3, CC, C, D
150
Unrated - 125
%
Scope of Service: The services to be provided by CRAB will include initial rating
and surveillance during use of the loan facility, also during the repayment period of
the loan facility. Surveillance will be done on an annual basis and will cover
assessment of financial position as well as the quality of the corporate management
of the client.
Rating will be completed within 4-6 weeks and surveillance within 3-4 weeks from
receipt of the data / information from the client
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Bank Loan/Client Rating
Methodology: The methodology is based on the relevant Guidelines issued by the
Bangladesh Bank. We have also included in the methodology criteria generally used
by CRAB for rating of entities and instruments belonging to different industries and
sectors. The methodology may be further revised to include the criteria used by
your Bank and to address your particular needs.
Information/Data Requirement: The requirements of the data have been
identified in the light of the Guidelines and the methodology indicted above, which
will be further revised in our standard process of validity testing.
RATING FEE:
Initial Rating Fee
(Year 1)
Surveillance/ Annual
Review (From Year 2
onwards)
Bank Loans/ Facility Ratings Long Term Exposures: Term Loan/Syndications
(Both Funded & Non Funded)
Limit Less than 20 crore Tk 2.0 Lac* Tk 1.60 Lac*
Limit Above 20 crore & Less
than 50 crore
Limit Above 50 crore & Less
than 100 crore
Limit Above 100 crore
Tk 2.0 Lac + .06% on
limit above 20 crore
Tk 3.80 Lac + .04% on
limit above 50.0 crore
Tk 5.80 Lac + .02% on
limit above 100 crore
Tk 1.60 Lac + .04% on
limit above 20.0 crore
Tk 2.80 Lac + .02% on
limit above 50.0 crore
Tk 3.80 Lac + .01% on
limit above 100 crore
Short Term Exposures: Working Capital (Both Funded & Non Funded)
Limit Less than 20 crore Tk 1.50 Lac* Tk 1.0 Lac*
Limit Above 20 crore & Less
than 50 crore
Limit Above 50 crore & Less
than 100 crore
Limit Above 100 crore
Corporate Entity Rating
Tk 1.50 Lac + .05% on
limit above 20 crore
Tk 3.0 Lac + .03% on
limit above 50.0 crore
Tk 4.50 Lac + .01% on
limit above 100 crore
with asset size above Tk 75 crore Tk 5.50 Lac* Tk 4.0 Lac
with asset size above 40 but less
than 75 crore
Tk 4.5 Lac
Tk 1.0 Lac + .04% on limit
above 20.0 crore
Tk 2.20 Lac + .02% on
limit above 50.0 crore
Tk 3.20 Lac + .01% on
limit above 100 crore
Tk 3.0 Lac
with asset size less than 40 crore Tk 3.50 Lac Tk 2.5 Lac
Entity Ratings SME/ MFIs
Asset size above Tk 20 crores Tk 3.0 Lac* Tk 2.5 Lac
Asset size in the range of Tk 10
crore to Tk 20 crores
Tk 2.5 Lac
Tk 2.0 Lac
Asset size less than Tk 10 crores Tk 2.0 Lac Tk 1.5 Lac
* Rating fees for more than 1 credit line/business unit will be negotiated
in favour of the client.
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Bank Loan/Client Rating
Special Arrangement with Banks
We offer that Banks would reach an MoU with CRAB for rating of their clients.
Under the MoU Banks will have the following privileges.
• Assist Banks in selecting exposures for rating
• CRAB would offer special rates to the clients of Banks
• CRAB would provide training workshops for the Bank officials to apply the
Basel II guidelines in decision making
• CRAB would arrange workshops fort Bank clients for familiarization of rating
• CRAB would offer special privileges to other rating requirements of the Bank,
i.e. Entity Rating, Tier II Bonds etc.
• CRAB professionals would assist Banks in transition to the IRB
Agreement with Clients
In accordance with our practice the client/obligor to be rated will have to sign an
agreement with CRAB stipulating the terms of the ratings. The rating fee will be paid
by the client (unless Bank wants to make the payment). The client will be
responsible to supply the required information.
Rating Process
On demand by the Bank for rating of a client, CRAB on signing the agreement with
client, will assign a team of analysts to perform the analysis. The rating team will
collect the information and prepare the preliminary report for internal review. A
draft report will then be given to the client, for their review. After getting feedback
from client, the report will be revised accordingly, and will be presented to the
independent Rating Committee. The Rating Committee will award the rating
through a detailed discussion with the analysts. The rating award along with a
detailed report containing the rationale and analysis will be given to the client.
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Bank Loan/Client Rating
Rating Scale
Long Term- Corporate
AAA (Extremely Strong Capacity & Highest Quality)
An obligor rated 'AAA' has extremely strong capacity to meet its financial commitments.
'AAA' is the highest issuer credit rating assigned by CRAB. AAA is judged to be of the highest
quality, with minimal credit risk.
AA1, AA2, AA3 (Very Strong Capacity & Very High Quality)
An obligor rated 'AA' has very strong capacity to meet its financial commitments. It differs
from the highest-rated obligors only to a small degree. AA is judged to be of very high quality
and is subject to very low credit risk.
A1, A2, A3 (Strong Capacity & High Quality)
An obligor rated 'A' has strong capacity to meet its financial commitments but is somewhat
more susceptible to the adverse effects of changes in circumstances and economic conditions
than obligors in higher-rated categories. A is judged to be of high quality and are subject to
low credit risk.
BBB1, BBB2, BBB3 Triple B (Adequate Capacity & Medium Quality)
An obligor rated 'BBB' has adequate capacity to meet its financial commitments. However,
adverse economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitments. BBB is subject to
moderate credit risk. They are considered medium-grade and as such may possess certain
speculative characteristics.
BB1, BB2, BB3 Double B (Inadequate Capacity & Substantial Credit Risk)
An obligor rated 'BB' is less vulnerable in the near term than other lower-rated obligors.
However, it faces major ongoing uncertainties and exposure to adverse business, financial, or
economic conditions, which could lead to the obligor's inadequate capacity to meet its
financial commitments. BB is judged to have speculative elements and is subject to substantial
credit risk.
B1, B2, B3 Single B (Weak Capacity & High Credit Risk)
An obligor rated 'B' is more vulnerable than the obligors rated 'BB', but the obligor currently
has the capacity to meet its financial commitments. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its financial
commitments. B is considered speculative and weak capacity and is subject to high credit risk.
CCC1, CCC2, CCC3 Triple C (Very Weak Capacity & Very High Credit Risk)
An obligor rated 'CCC' is currently vulnerable, and is dependent upon favourable business,
financial, and economic conditions to meet its financial commitments. CCC is judged to be of
very weak standing and is subject to very high credit risk.
CC Double C (Extremely Weak Capacity & Extremely High Credit Risk)
An obligor rated 'CC' is currently highly vulnerable. CC is highly speculative and is likely in, or
very near, default, with some prospect of recovery of principal and interest.
C Single C (Near to Default)
A 'C' rating is assigned to obligors that are currently highly vulnerable to non-payment.
Obligations rated C have payment arrearages allowed by the terms of the documents, or
obligations of an issuer that is the subject of a bankruptcy petition or similar action which
have not experienced a payment default.
D (Default)
'D' is in default. The 'D' rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
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Bank Loan/Client Rating
Short Term – Corporate
ST-1
Rating indicates that entity’s/issuer’s capacity to meet its financial commitment on the
obligation is strong
ST-2
Rated entity/issuer is susceptible to adverse economic conditions however the
obligor's capacity to meet its financial commitment on the obligation is satisfactory
ST-3
Adverse economic conditions are likely to weaken the entity’s/issuer’s capacity to
meet its financial commitment on the obligation
ST-4
Entity/issuer has significant speculative characteristics. The obligor currently has the
capacity to meet its financial obligation but faces major ongoing uncertainties that
could impact its financial commitment on the obligation.
ST-5
Entity/issuer currently vulnerable to nonpayment and is dependent upon favourable
business, financial and economic conditions for the obligor to meet its financial
commitment on the obligation.
ST -6
Entity/issuer is in payment default. Obligation not made on due date and grace period
may not have expired. The rating is also used upon the filing of a bankruptcy petition.
© Credit Rating Agency of Bangladesh Ltd, May 2009.
Enclosed:
1. Draft MoU
2. List of Clients
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