External rating of banks    

The central bank in its latest monetary policy statement (MPS) just in one sentence mooted an idea that deserves serious consideration by all stakeholders, including the shareholders, in the banking sector.

The Bangladesh Bank (BB) said it was encouraging 'banks to get rated by internationally reputable credit rated agencies, which can help improve competition and governance, and market access'.

Given the prevailing situation in the country's banking sector, the central bank's encouragement, it seems, has come in the right direction. But most banks are unlikely to like the BB's idea. The reason/s for the banks doing so is not that difficult to understand. The move, if it gets implemented, will make the process of playing with numbers in the balance sheets difficult for them. It is almost certain that the 'reputable international rating agencies' would not give their ratings without looking deep into finance of banks.

At least eight local rating agencies after receiving permission from the Bangladesh Securities and Exchange Commission (BSEC) are now in operation in the country. In most cases, the listed banks and financial institutions get rating from these rating agencies and only those who get good ratings are seen publishing the same in newspapers and others somehow skip it. It is not known whether it is mandatory for all listed companies to secure ratings from the rating agencies annually and get the same published in newspapers for consumption of the investors.

Any company seeking to raise funds from the stock market by issuing initial public offering (IPO), it is required to get itself rated by the rating agencies.

The quality of financial reports of banks and other listed stocks is very important. There exits some suspicion in this particular area just because of lack of honesty and integrity among a section of audit firms. Such lack of confidence in the quality of financials has led to the enactment of the Financial Reporting Act and the formation of Financial Reporting Council (FRC) to regulate the activities of audit firms. But the outcome of the move is yet to be visible.

It is widely suspected that the financial of a good number of banks do not depict their actual financial health and those deserve in-depth scrutiny. But none cares to do the job. The volume of non-performing loans in the banking industry being very high has stirred up worries both in the banking and official circles. But industry insiders tend to believe that the actual volume of stressed loans is bigger than what is shown in the central bank statistics. A sizeable volume of classified loans is kept hidden in the maze of figures.

Thus, side by side with the move to get the banks rated by external rating agencies, the central bank might think of asking a few banks that are not in good shape to get their financials audited by foreign audit firms. The outcome might even strengthen the hands of the BB to extend similar auditing to other banks.

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