Icra Nepal to evaluate credit worthiness of borrowers

KATHMANDU:

Borrowers from financial institutions can be evaluated regarding their repayment capacity and credit worthiness by a rating agency from now on. At present, financial institutions themselves appraise the companies based on the financials submitted while applying for the loans to approve it and also use the service of Credit Information Bureau to learn the credit history.

However, Icra Nepal — Nepal’s only credit rating agency — has introduced rating parameters directed at corporate borrowers of financial institutions called Bank Loan/Line of Credit Rating. Borrowers will be rated based on their capability to timely meet debt obligations against a specific line of credit, based on the future cash generation and their debt servicing.

“We have prepared the rating product and we are hoping the banking regulator — Nepal Rastra Bank (NRB) — will recognise the credit rating parameter as an indicator of risks associated with certain loans,” pointed out Managing Director of Icra Nepal, Deepak Raj Kafle.

“If NRB recognises the rating assigned by the agency to borrowers as an indicator of the risk associated with the loans issued, lending institutions can manage their capital adequacy better,” he added.

Financial institutions assign certain risk weightage to their assets based on the Basel accords while calculating capital adequacy ratio, so more capital is required to cushion a probable default of riskier lending. Icra Nepal is hoping for NRB to recognise its ratings assigned to borrowers and lower the risk weightage to the better-rated ones so that banks will have to allocate less capital for the less riskier line of credit.

“We have finished designing the rating parameters for the products and are in the initial stage of discussion with the central bank,” informed Kafle.

Although the concept is new in Nepal, line of credit rating has been in existence in developed financial markets. Moreover, credit bureaus even keep an individual person’s credit score based on their credit history and income so that lenders and credit card companies decide whether the person qualifies for the loan or not and what interest to charge.

Along with the line of credit rating, Icra Nepal has also proposed Claims Paying Ability Ratings for insurance companies. “This will also help prospective policy buyers to select an insurer based on their claims settlement capacity,” informed Kafle.

The rating process will involve an analysis of an insurer’s business fundamentals and its competitive position, and focuses primarily on insurer’s franchise value, its management, organisational structure and underwriting and investment strategies.

Icra Nepal has been providing its rating for public offerings, debt instruments and issuers since the past one year and has started looking into other avenues as well. It had launched rating parameters directed at asset fund managers such as mutual fund managers called Fund Management Quality Rating, a month back. The mutual funds are to be rated based on the

fund manager’s financial strength, investment performance, human resource and governance by the credit rating agency from now on.

Source: THT