Credit rating, in my view, is much more than simply assigning a grade or rating to an organisation. At its core, it is an independent and structured opinion on the extent to which an institution is likely to meet its financial obligations on time and in full. Its importance is growing steadily in the decision-making processes of banks, financial institutions, investors and corporate organisations.
Bangladesh’s credit rating industry has gradually matured over the past decade or more. In its early years, awareness of credit ratings was relatively limited. Many organisations did not have a clear understanding of why a rating was necessary, what information needed to be provided, or how a rating was determined. The situation has changed considerably. Credit ratings are now playing an increasingly important role, particularly in bank lending, the capital market, bonds and other debt instruments.
At present, eight credit rating companies are listed with the Bangladesh Securities and Exchange Commission (BSEC): Credit Rating Agency of Bangladesh Ltd. (CRAB), Credit Rating Information and Services Ltd. (CRISL), Emerging Credit Rating Ltd. (ECRL), National Credit Ratings Ltd. (NCRL), Alpha Credit Rating Ltd., ARGUS Credit Rating Services Ltd., WASO Credit Rating Company (BD) Ltd. and The Bangladesh Rating Agency Ltd. In my view, however, the number of rating agencies operating in the market is less important than the quality of ratings, analytical independence, reliability of information and confidence that market participants place in those ratings.
A meaningful credit assessment cannot be based solely on an organisation’s financial statements. Its business model, management structure, industry risks, cash flows, debt burden, market conditions and prospects must also be taken into account. The growing participation of small and medium-sized enterprises (SMEs) is another important development. Alongside large corporations, many SMEs depend on bank finance and other forms of financial support. A structured credit assessment system can therefore play an important role in establishing their formal credit profiles. In simple terms, a credit rating is an independent assessment of an organisation’s ability and likelihood to repay its financial obligations.
When a bank considers lending to a business, relying solely on information supplied by the borrower can create information gaps and information asymmetry. A credit rating agency can help reduce this gap by providing an independent assessment based on financial and non-financial information. A rating gives lenders and investors a comparative understanding of an organisation’s financial strength, debt-servicing capacity and overall risk profile. It is important, however, not to regard a credit rating as a guarantee of future performance. A rating is an opinion and an assessment of risk – not a certainty about what will happen in the future.
The precise methodology varies according to the agency and the type of rating being undertaken. Broadly, however, the process involves several stages. First, the agency collects the required financial and non-financial information from the organisation. Its financial statements, banking information, outstanding loans, business operations, management and industry conditions are then examined. Where necessary, analysts hold discussions with management, conduct site visits and verify information from other available sources. Financial ratios, cash flow, debt-servicing capacity, business risks and prospects are assessed.
The analysis is subsequently reviewed by the relevant rating committee, which makes the final rating decision. Once the rating has been assigned, surveillance or ongoing monitoring generally continues in accordance with applicable requirements and contractual arrangements. This allows material changes in an organisation’s financial or business position to be assessed.
Credit ratings are not determined simply by looking at profit and loss figures. A proper assessment of an organisation’s overall risk requires consideration of both financial and non-financial factors.
Key financial considerations include consistency of sales and revenue, profitability and EBITDA/EBITDA margin, debt-to-equity and overall leverage, current ratio and liquidity position, operating cash flow, interest coverage and Debt Service Coverage Ratio (DSCR), bank borrowings, repayment history and overdue obligations, working-capital management, and the quality and transparency of audited financial statements. Equally important are the competence and experience of management, corporate governance, the business model and market position, industry risks and competitive pressures, customer and supplier concentration, legal and regulatory risks, environmental and social risks, and future business plans and projected cash flows. This broader approach is essential because financial performance alone cannot fully capture the risks facing a business.
Credit risk management is particularly important in Bangladesh’s banking system. When a bank finances a corporate or other borrower, an external credit rating can serve as one useful source of information in assessing the borrower’s risk. Under Bangladesh Bank’s ECAI framework, eligible external credit ratings can be used in determining risk-weighted assets and capital requirements. This means that sound external credit assessment can have a practical impact on the way banks measure credit risk.
There is, however, an important distinction to be made. A good credit rating does not mean that a bank must approve a loan. Banks still have to conduct their own credit appraisal and consider security, repayment capacity, cash flow and other prudential requirements. Similarly, a lower rating does not necessarily mean that a company will default. Rather, it is a signal that the organisation carries a comparatively higher level of credit risk.
A well-functioning credit rating system can provide several benefits to the financial market. It can reduce information gaps between borrowers, lenders and investors and provide an independent opinion on an organisation’s creditworthiness. It can also support banks in their credit risk assessment and enhance the credibility of bonds and other debt instruments in the eyes of potential investors.
Ratings make it easier to compare the relative risk of similar organisations. They can also help companies identify financial weaknesses and encourage improvements in corporate governance, disclosure standards and financial discipline. For SMEs in particular, obtaining a formal credit profile can help establish a more structured basis for their engagement with banks and other financial institutions.
Despite these benefits, credit ratings have limitations that should not be overlooked. In my view, it is a mistake to make decisions solely based on a rating grade without understanding these limitations. First, a rating is an opinion rather than a guarantee against future default. Secondly, the quality of an assessment depends heavily on the availability, accuracy and completeness of information. If the underlying information is weak or incomplete, the resulting assessment may also be affected.
Business conditions can also change rapidly. A rating based on information available at one point in time may not fully reflect a company’s current risk if its operating environment changes significantly. The rating process also involves time and cost, which can represent an additional burden for smaller organisations. Another important concern is the potential conflict of interest inherent in the issuer-paid model, under which a rating agency receives fees from the entity it rates. This makes strong governance, transparent methodologies, analyst independence, compliance and effective surveillance particularly important. Finally, excessive reliance on ratings can create another risk: banks and investors may become less rigorous in conducting their own due diligence.
Independence is arguably one of the most important issues facing the credit rating industry. Since a rating agency normally receives its fees from the organisation being rated, questions about potential conflicts of interest are inevitable. This is precisely why regulatory requirements and internal safeguards matter. Documented methodologies, analyst independence, rating committees, proper disclosure, compliance functions and ongoing surveillance are all essential to maintaining credibility.
An important point in any discussion of the regulatory environment is that the Credit Rating Companies Rules, 1996, are no longer the governing rules. In 2022, the BSEC introduced the Bangladesh Securities and Exchange Commission (Credit Rating Companies) Rules, 2022, repealing the 1996 Rules. Therefore, while the 1996 Rules may be referred to as part of the historical development of the industry, the 2022 Rules should be treated as the relevant regulatory framework for the present market.
The BSEC also published a draft notification in 2024 concerning amendments to the Credit Rating Companies Rules, 2022. This indicates that the regulatory framework continues to evolve in response to market requirements.
Despite the progress made, several challenges remain. The quality of financial disclosure and documentation is not yet uniform across all organisations. In some cases, there can also be significant differences between management projections and actual performance. The realities of stressed assets and credit risk in the banking sector have further increased the importance of reliable credit assessment. At the same time, the market needs greater confidence in the quality and consistency of ratings.
For SMEs, there is scope to reduce the cost and documentation burden associated with obtaining a rating. A more streamlined process could encourage wider participation without compromising analytical quality. Perhaps most importantly, credit ratings need to be viewed not merely as a regulatory compliance requirement but as a genuine risk-management tool.
From my professional observation, Bangladesh’s credit rating industry is no longer the new or unfamiliar concept that it once was. Organisations involved in banking and the capital market are considerably more aware of the need for ratings. Nevertheless, the market has not yet reached a stage where rating reports are consistently treated by all stakeholders as a powerful decision-making tool. If banks and investors use ratings alongside rigorous internal due diligence, credit ratings can become an effective tool for early warning and comparative risk assessment.
Several measures could help strengthen the industry further. Rating methodologies and key assumptions should be communicated to the market in simpler and more accessible language. Streamlined documentation and more affordable rating processes should be developed for SMEs. More historical data on defaults, rating transitions and rating performance should be published. Analyst training, sector expertise and professional certification should be strengthened. Conflict-of-interest management should be further enhanced. Regular knowledge-sharing seminars should be organised involving banks, regulators, rating agencies and the corporate sector. Investors and bankers should be encouraged to understand that an external rating complements, rather than replaces, independent due diligence.
In a developed financial system, the importance of credit ratings is difficult to dispute. They can reduce information gaps between lenders, investors and borrowers while providing a structured framework for understanding credit risk.
But a rating should never be treated as the sole basis for a financial decision. Bangladesh’s credit rating industry has made considerable progress in recent years, and the present regulatory framework is more structured than the earlier regime. The most important issue for the industry going forward, however, will not be the number of rating agencies or ratings issued. It will be the quality, independence, transparency and credibility of those ratings.
In my view, if these areas can be strengthened further, credit ratings can move beyond being simply a component of regulatory compliance and become a powerful instrument of risk management for Bangladesh’s banking system and capital market.
The ultimate objective should be to create a market in which a credit rating is neither blindly accepted nor casually dismissed, but properly understood as one important component of a broader and disciplined credit assessment process.
Author is the Accounts Officer of Emerging Credit Rating Ltd. The views expressed in this article are solely those of the author.
