Why Banks Need Credit Rating

Bank rating is arising from the fact that the banks and financial institutions are highly leveraged. A bank with an average owner’s equity and undertaking a liability of guarantees to repay in timely manner. The fund collected through the above guarantees is invested with full potential risk to earn a net interest margin through undertaking high credit risk, operational risk and market risk. The above situation puts the banks and financial institutions in such a vulnerable position that any mistake in the process may put the bank in a distress situation. Keeping in view the above globally banks ate managed through a very cautious asset liability management system (ALM).  

The objective of commercial bank rating is to provide an opinion on the relative inherent quality of the equity instrument contemplated to be issued at public offer. The rating opinion is reflected by the earnings prospects, risk and financial strength, associated with the specific bank. Rating of commercial bank for the purpose of public offer does not predict the future market price of the share; rather it rates the fundamentals of a bank, which ultimately act as important inputs in the price behavior of the share of the bank over the medium and long term perspectives. In the short term, commercial bank rating facilitates the reconciliation of the market attitude with respect to the share of company to the long-term fundamentals as reflected by the equity rating.

The benefits of Credit Rating to Banks are:

• Rating of a Public Offer issued by Commercial Bank would ensure due compliance with the relevant legal regulatory provision of the Securities & Exchange Commission (SEC) and Central Bank.
• Rating would facilitate the issuer bank to effect of credibility among potential investors.
• CRA opinion would help the issuer company to broaden the market for their equity. As name recognition is replaced by objective opinions, the issuer company may access the equity market more comfortably.
• Equity Instrument Rating may help in establishing issuer access to the equity market even when the market price of listed equities is relatively unfavorable in the prevailing market conditions.
• Rating would facilitate a bank with fundamental strength an extended level of confidence from the depositors. Syndication partners, other banks and financing companies, international financial market and regulatory agencies.
• CRA rating would provide the Commercial Bank with an in depth analysis of the overall position and performance of the bank in comparison with its competitors in the peer group and give a guideline for areas of improvement.
• Commercial Bank Rating would give market participants timely access to unbiased, objective, independent, expert, professional opinion on the equity quality in a user friendly manner that may be relied upon for investment decisions.
• Rating opinion would facilitate the investors to decide their portfolios by choosing investment options in the equity market according to their profiles and preferences.
• Equity Instrument Rating would affect significant contribution towards developing the stock market investor confidence and enhancing the quality and perfection of the securities markets, through provision of credible information for guidance of institutional and individual investors.