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The credit rating process

Speakers highlighted the benefits for corporate entities and investors

May 14 - 20, 2001

The government of Pakistan (GoP) envisages greater role for the private sector in economic development of the country. When decisions are driven by market forces, utilization of each rupee becomes important. To help the investors, in prudent decision making, credit rating of an entity and a financial product becomes very important. The rating agencies have to assume the responsibility of educating both the issuers as well as the investors. The Management Association of Pakistan (MAP) recently arranged a very timely seminar on Credit Rating Process. The speakers were: Faheem Ahmed and Jamal Abbas of JCR-VIS, Etrat Rizvi of National Development Leasing Corporation and Ramon Alfrey of Orix Leasing Pakistan.

In Pakistan, credit rating is still in its early stages. However, regulatory agencies like Securities and Exchange Commission of Pakistan (SECP) and the central bank have made it mandatory for financial sector entities to obtain credit rating on regular basis. While credit rating was a requirement for the leasing companies for past several years, the central bank has made it mandatory for the commercial banks to have themselves rated by June 30, 2001.

While describing the role of credit rating agencies, Faheem Ahmed said, "At present two credit agencies are operating in the country. JCR-VIS (previously DCR-VIS) is one of them and has been in operation for more than six years. Credit rating is a yardstick to access the risk and it is an opinion expressing the capabilities of the entity to withstand the future. There are two types of rating Prime and sub-prime and mostly companies publicize their prime rating only. However, those companies which may fall in sub-prime category work hard to improve their rating. Credit rating brings greater disclosure and transparency. However, prudent decision making remains the responsibility of investors."

Jamal Abbas explained the process of credit rating in detail. It also emerged that credit rating is not only dependent on performance of the entity but also on the factors affecting its performance and sovereign rating of the country. There are internal and external factors affecting the credit rating of an entity. Since the entities are evaluated on quarterly basis, there are bright prospects for improvement, if management has a game plan.

Etrat Rizvi, Managing Director, National Development Leasing Corporation narrated his experiences. He said, "Pakistan is gradually moving away from centralized planning and allocation of funds on soft terms to investment decisions being made on market based economy. The market forces guide the allocation of resources and the government intervention is minimum. The role of DFIs and subsidized credit is on the decline. Private sector investment is driven by a philosophy of protecting the interest of all the stakeholders. Since individual investors neither have the time nor the resources to assess creditworthiness of a company, credit rating by the independent agencies has assumed an important role in informed decision making."

Ramon Alfrey, General Manager Finance, Orix Leasing Pakistan explained the importance of credit rating in resource mobilization. He said, "We are part of an internationally known leasing company from Japan. However, it was also mandatory for us to acquire credit rating at the time of flotation of term finance certificates (TFCs). The past performance and detailed game plan helped the Company in securing a better rating and ultimately float TFCs at a very competitive coupon rate."

Importance of corporate governance, proper disclosure, self and statutory regulatory mechanism are the key factors affecting the investment climate in Pakistan. During the question and answer session the need for a self-regulation was stressed. However, it was also felt that the SECP has a greater role to play till the time self-regulatory regime assumes the major role.

Earlier Mr. Massod Naqvi, Vice President of MAP introduced the topic and the speakers. At the end of the seminar he also proposed vote of thanks and appreciated a very lively and interactive interaction during the question and answer session.