BASEL II

New Capital Adequacy Framework

CRAB's Services for Bank Clients

Corporate/Entity/Issuer Rating Bank Loan/Line of Credit Rating

C R E D I T R AT I N G A G E N C Y O F B A N G L A D E S H LT D .

ABOUT CRAB

Credit Rating Agency of Bangladesh Limited (CRAB) was set up in 2003 by leading financial/investment institutions and individuals as an independent and professional full service Credit Rating Agency. ICRA Ltd, India subsidiary of international Credit Rating Agency Moody's Investors Service, USA is the technical partner of CRAB. CRAB is a Public Limited Company. Mr. M. Syeduzzaman, former Finance Minister, is the Chairman of the Company. Mr. Md. Matiul Islam, former Finance Secretary is the Vice Chairman. Mr. Hamidul Huq, former MD of United Commercial Bank Ltd is the Managing Director. He is aided by a pool of experienced and trained professionals.

BOARD OF DIRECTORS

CHAIRMAN M. Syeduzzaman Former Finance Minister, Govt. of Bangladesh

VICE CHAIRMAN Md. Matiul Islam, FCA Chairman, Industrial and Infrastructure Development Finance Company Ltd. Former Secretary of Finance, Govt. of Bangladesh

DIRECTORS

Samson H. Chowdhury Chairman, Square Phamaceuticals Ltd. Astras Ltd.

Syed Manzur Elahi Chairman, Apex Footwear Ltd. & Apex Tannery Ltd. Former Advisor to the Caretaker Govt. of Bangladesh

M. Haider Chowdhury Former Chairman, National Life Insurance Co. Ltd.

Mir Mustafizur Rahman Former Secretary of Finance, Govt. of Bangladesh

M. Anis Ud Dowla Chairman, ACI Ltd.

A K M Rafiqul Islam, FCA Managing Director, Pragati Insurance Ltd.

Muhammed Faizur Rahman Chairman, Asian Surveyors Ltd.

A. S. M. Quasem Chairman, New Age Group

Sohail Humayun Managing Director, Unicorn Equities Ltd

Md. Humayun Kabir Managing Director, Investment Corporation of Bangladesh

Managing Director IDLC Finance Ltd.

Hamidul Huq Managing Director Credit Rating Agency of Bangladesh Ltd.

RATING COMMITTEE
CRAB's ratings are awarded by an independent rating committee comprising of former Deputy Governors of Bangladesh Bank, former Comptroller & Auditor Generals, noted economists, former Chairman of Securities & Exchange Commission, Islami Bank specialist etc.

Dr. Mohammad Haroonur Rashid Former Secretary and Member Planning Commission and Chairman of Securities & Exchange Commission of Bangladesh

Dr. Muzaffar Ahmed Noted Economist Former Director, Institute of Business Administration, Dhaka University

Dr. AB Mirza Md Azizul Islam Former Advisor to Caretaker Govt. of Bangladesh, Former Chairman of Securities & Exchange Commission of Bangladesh

Mohammad Sohrab Uddin Ph.D, AIA Actuary, Former Deputy Governor, Bangladesh Bank

ECAI STATUS
Bangladesh Bank accredited CRAB as an External Credit Assessment Institution (ECAI) in April 2009. Under the standardized approach for calculating risk weighted assets against credit risk, the credit rating is to be determined on the basis of risk profile assessed by the ECAIs. Banks will use the ratings of the ECAIs and corresponding risk weight for calculating RWA for credit risk under the standardized approach.

Ataul Haq Former Deputy Governor, Bangladesh Bank Former Managing Director, IFIC Bank Ltd

Khondkar Ibrahim Khaled Former Deputy Governor, Bangladesh Bank Chairman, Bangladesh Krishi Bank

Syed Yusuf Hussain Chairman, Bangladesh Energy Regulatory Commission Former Comptroller & Auditor General of Bangladesh

Asif Ali Former Comptroller & Auditor General of Bangladesh

M. Azizul Huq Noted Expert on Islamic Banking & Former Executive President, Islami Bank Bangladesh Ltd.

Hamidul Huq Managing Director Credit Rating Agency of Bangladesh Ltd.

BACKGROUND

BASEL II
Basel II is recommendatory framework for banking supervision, issued by the Basel Committee on Banking Supervision in June 2004. The objective of Basel II is to bring about international convergence of capital measurement and standards in the banking system. The Basel Committee members who finalised the provisions are primarily representatives from the G10 countries, but several countries that are not represented on the committee have also stated their intent to adopt this framework.

Bangladesh Bank in December 2008, issued guidelines on the New Capital Adequacy Framework (BRPD Circular 09, dated 31.12.08) to banks operating in Bangladesh, based on the Basel II framework. These guidelines inform that BB suggests implementation of Basel II with the following approaches: i) Standardised approach for calculating RWA against credit risk; ii) Standardised approach for calculating RWA against Market Risk; and iii) Basic indicator approach for calculating RWA against Operational Risk. Under the standardised approach for measuring credit risks, the risk grades are determined on the basis of ratings assigned by the ECAIs.

RISK WEIGHTS OF CORPORATE CLAIMS UNDER BASEL II

Bangladesh Bank Rating Grade
1

Equivalent CRAB Rating

AAA AA1, AA2 AA3, A1, A2, A3, BBB1, BBB2, BBB3 BB1, BB2, BB3, B1, B2, B3, CCC1, CCC2, CCC3, CC, C, D -

Risk Weight %
20 50 100 150

CLAIMS ON CORPORATE (excluding equity exposures)

2 3,4 5,6

Unrated

125

MAPPING OF CRAB WITH BB RISK GRADE

BB rating grade
1 2 3 4 5 6

Equivalent rating of CRAB

AAA AA1, AA2 AA3, A1, A2, A3 BBB1, BBB2, BBB3 BB1, BB2, BB3, B1, B2, B3, CCC1, CCC2 CCC3, CC, C, D

Short Term Rating

S1 S2 S3 S4 S5 S6

Equivalent rating of CRAB

ST-1 ST-2 ST-3 ST-4 ST-5 ST-6

C R A B ' S R AT I N G S E RV I C E S FOR BANK CLIENTS UNDER BASEL II

CORPORATE/ ENTITY/ ISSUER RATING

CRAB's corporate entity or issuer rating methodology is developed for analysis of non-financial organizations operating in manufacturing, assembling, service sector etc. The generic factors are common for all entities/issuers, while criterion specific for different industries are used for rating. There is rating criterion for rating of entities in different industries. The rating considers the overall position and credibility of an entity through analysis of the following factors:

CORPORATE RATING

Industry Risk Analysis

Management Evaluation

Business Risk Analysis

Corporate Rating

Corporate Governance

Operating Environment

Operating Performance

Strategy and Financial Policies

Financial Strength

Strategy and Financial Policies

Generic Rating Factors

Relationship Risk Analysis

RATING DEFINITION :

Long Term

Corporate

AAA (Triple A) Have extremely strong capacity to meet financial commitments. Judged to be of the highest quality, with minimal credit risk. AA1, AA2, AA3 (Double A) Have very strong capacity to meet financial commitments. Judged to be of very high quality, subject to very low credit risk. A1, A2, A3 (Single A) Have strong capacity to meet financial commitments, but susceptible to the adverse effects of changes in circumstances and economic conditions. Judged to be of high quality , subject to low credit risk. BBB1, BBB2, BBB3 (Triple B) Have adequate capacity to meet financial commitments but more susceptible to adverse economic conditions or changing circumstances. Subject to moderate credit risk. Possess certain speculative characteristics. BB1, BB2, BB3 (Double B) Have inadequate capacity to meet financial commitments. Have major ongoing uncertainties and exposure to adverse business, financial, or economic conditions. Have speculative elements, subject to substantial credit risk. B1, B2, B3 (Single B) Have weak capacity to meet financial commitments. Have speculative elements, subject to high credit risk. CCC1, CCC2, CCC3 (Triple C) Have very weak capacity to meet financial obligations. Have very weak standing and are subject to very high credit risk. CC (Double C) Have extremely weak capacity to meet financial obligations. Highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest. C (Single C) Highly vulnerable to non-payment, have payment arrearages allowed by the terms of the documents, or subject of bankruptcy petition, but have not experienced a payment default. Payments may have been suspended in accordance with the instrument's terms. Typically in default, with little prospect for recovery of principal or interest. D Default. Will also be used upon the filing of a bankruptcy petition or similar action if payments on an obligation are jeopardized.

Short Term
ST-1: Highest Grade. Highest capacity for timely repayment of obligations. ST-2: High Grade. Strong capacity for timely repayment. ST-3: Average Grade. Average capacity for timely repayment of obligations. ST-4: Below Average Grade. Below average capacity for timely repayment of obligations. ST-5: Inadequate Grade. Inadequate capacity for timely repayment of obligations. ST-6: Lowest Grade. High risk of default or are currently in default.

BANK LOAN/LINE OF CREDIT RATING

CRAB offers Bank Loan Ratings to various types of facilities provided by banks, such as working capital demand loans, cash credit, project loans, loans for general corporate purposes, and non-fund-based facilities. Bank loan ratings indicate the degree of risk with regard to timely payment of interest and principal on the facility being rated. The Bank Loan Rating service from CRAB entails evaluating the capability of an issuer (borrower of a bank) to timely meet its debt obligations against a specific line of credit, in the light of the relevant terms, conditions and covenants. CRAB considers all relevant factors that have a bearing on the future cash generation and debt servicing ability of the
Industry characteristics & regulations Operational efficiency

Competitive position

Management quality

Loan /Line of Credit Rating

Commitment to new projects

Strength of associate companies

Financial Strength

Strategy & Financial policies

Securities and relationship

Generic rating factors

Loan terms & Covenants

borrower. A detailed analysis of past financial statements is made to assess performance under "real world" business dynamics. Estimates of future earnings over the next three to five years under various sensitivity scenarios are drawn up and evaluated against the claims and obligations that would require servicing. Primarily, it is the relative comfort on the level and quality of the issuer's cash flows to service obligations that determines its rating.
RATING DEFINITION :

Long Term

Bank Loan/Line of Credit

AAA (Triple A) Have extremely strong capacity to meet financial commitments. Judged to be of the highest quality, with minimal credit risk. AA1, AA2, AA3 (Double A) Have very strong capacity to meet financial commitments. Judged to be of very high quality, subject to very low credit risk. A1, A2, A3 (Single A) Have strong capacity to meet financial commitments, but susceptible to the adverse effects of changes in circumstances and economic conditions. Judged to be of high quality, subject to low credit risk. BBB1, BBB2, BBB3 (Triple B) Have adequate capacity to meet financial commitments but more suspectible to adverse economic conditions or changing circumstances. Subject to moderate credit risk. Possess certain speculative characteristics. BB1, BB2, BB3 (Double B) Have inadequate capacity to meet financial commitments. Have major ongoing uncertainties and exposure to adverse business, financial, or economic conditions. Have speculative elements, subject to substantial credit risk. B1, B2, B3 (Single B) Have weak capacity to meet financial commitments. Have speculative elements, subject to high credit risk. CCC1, CCC2, CCC3 (Triple C) Have very weak capacity to meet financial obligations. Have very weak standing and are subject to very high credit risk. CC (Double C) Have extremely weak capacity to meet financial obligations. Highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest. C (Single C) Highly vulnerable to non-payment, have payment arrearages allowed by the terms of the documents, or subject of bankruptcy petition, but have not experienced a payment default. Payments may have been suspended in accordance with the instrument's terms. Typically in default, with little prospect for recovery of principal or interest. D Default. Will also be used upon the filing of a bankruptcy petition or similar action if payments on an obligation are jeopardized.

Short Term
ST-1: Highest Grade. Highest capacity for timely repayment of obligations. ST-2: High Grade. Strong capacity for timely repayment. ST-3: Average Grade. Average capacity for timely repayment of obligations. ST-4: Below Average Grade. Below average capacity for timely repayment of obligations. ST-5: Inadequate Grade. Inadequate capacity for timely repayment of obligations. ST-6: Lowest Grade. High risk of default or are currently in default.

SCOPE OF SERVICE
Scope of Service: The services to be provided by CRAB will include initial rating and surveillance during use of the loan facility, also during the repayment period of the loan facility. Surveillance will be done on an annual basis and will cover assessment of financial position as well as the quality of the corporate management of the client. Rating will be completed within 4-6 weeks and surveillance within 3-4 weeks from receipt of the data / information from the client Information/Data Requirement: The requirements of the data have been identified in the light of the Guidelines and the methodology indicted above, which will be further revised in our standard process of validity testing.

BENEFITS OF RATING FOR CLIENTS (CORPORATE/BORROWERS)

FOR BORROWERS Rating will help borrowers with wider scope of banking with decreased processing time Rating will eventually help borrowers obtain more precise risk-based pricing on loans/investments. Borrowers may also benefit when the capital savings that the banks enjoy are reflected in loan pricing. Borrowers will know the parameters associated with rating and get a chance to improve on these. They will be able to explore alternative & cheap markets of financing The ratings may be useful in making deals with cross boarder parties and financial institutions Will help organizations develop their corporate governance and risk management In the long run, as many lower rated borrowers obtain BLRs, and the market understands the risk associated with such lower ratings, access to markets for lower rated companies is likely to improve significantly. FOR BANKS The new guidelines from BB create an incentive for banks to use ratings, by giving significant relief in the capital that banks must hold against their corporate loan exposures. The highest relief of 80 per cent is available for 'AAA' rated exposures, but there is substantial relief for exposures that are rated below the highest category as well. Will assist Banks to eventually enter into Internal Rating Based approach. SPECIAL ARRANGEMENT WITH CLIENTS We offer that Corporate would reach an arrangement with CRAB for rating of the companies and their bank exposures. Under such arrangement Corporate will have the following privileges. Assist Corporate in selecting the Companies under the Group for rating CRAB would offer special rates for rating of more than one Company and/or exposure CRAB would arrange programs for the officials of Companies for familiarization of rating CRAB would offer special privileges to all future rating requirements of the Corporate, i.e. IPO, Debenture, Bonds etc. CRAB professionals would assist Corporate in providing information AGREEMENT WITH CLIENTS In accordance with our practice the client/obligor to be rated will have to sign an agreement with CRAB stipulating the terms of the ratings. The rating fee will be paid by the client. The client will be responsible to supply the required information.

Rating Process
On demand by the Bank for rating of a client, CRAB on signing the agreement with client, will assign a team of analysts to perform the analysis. The rating team will collect the information and prepare the preliminary report for internal review. A draft report will then be given to the client, for their review. After getting feedback from client, the report will be revised accordingly, and will be presented to the independent Rating Committee. The Rating Committee will award the rating through a detailed discussion with the analysts. The rating award along with a detailed report containing the rationale and analysis will be given to the client.

FA Q
1. When do Basel II norms come into effect?
The revised framework for capital adequacy all the scheduled banks will start implementing revised regulatory capital framework "Risk Based Capital Adequacy for Banks" from January 2009. For the purpose of statutory compliance during the period of parallel run i.e. 2009, the computation of capital adequacy requirement under existing rules will prevail.

2. What is the impact of Basel II on banks in Bangladesh?

Under the new framework, banks will need to provide capital for credit risk based on the risk associated with their loan portfolios. If a bank has high-quality credit exposures (for example, if the majority of its credit exposures are in the 'AAA' and 'AA' categories) it will save capital on account of credit risk; the difference is apparent in the illustration below. Conversely, a bank with relatively lower rated credit exposures will need to provide more capital. Illustration of capital-saving potential by banks on a loan of Tk. 1000 Million Basel I Rating Risk weight AAA AA1 & AA2 AA3-BBB BB and below Unrated 100% 100% 100% 100% 100% Capital required* (tk. mn) 100 100 100 100 100 Basel II Capital required1 (tk. mn) 20 80 50 100 135 125 50 0 -35 -25 Capital saved (tk. mn)

Risk weight 20% 50% 100% 150% 125%

* Capital required is computed as Loan Amount x Risk Weight x 10%

Additionally, banks will have to provide incremental capital for market risk and operational risk. Capital for operational risk was not part of the previous regulatory framework.

3. Is credit rating mandatory under Basel II for all bank clients/ exposures given by banks?
Credit rating is not mandatory under Basel II. However, banks are likely to be able to save capital if they get their counterparties/ loan portfolios rated. If a bank chooses to keep some of its clients/loans unrated, it may have to provide a risk weight of 125 per cent for credit risk on such loans. On the other hand, by getting clients/exposures rated, a bank can save capital on loans in the higher rating categories, as shown in the illustration above. CRAB expects pricing of fresh loans to be strongly correlated with the credit ratings that such loans carry. Higher-rated companies in particular will benefit from this development.

4. Should agreement be made with Bank or its Client?

The Rating agreement must be made between Bank's Client and Credit Rating Agency. The rating must be solicited and accepted by a client for its use by Bank for capital adequacy calculation purpose. Banks may request and refer their clients for rating.

5. Which types of companies/facilities will be rated by CRAB?

CRAB will rate all types of companies and loans & working capital facilities of banks. The loan/line of credit ratings include project loans, corporate loans, general purpose loans, working capital demand loans, cash credit facilities, and non-fund-based facilities like letters of credit and bank guarantees.

6. Why will companies/bank clients now want to get themselves rated?

Under the earlier framework, there was no need for a borrower to have itself or its loans/ bank facilities rated. This will change with the implementation of the new framework: BB has asked banks to use ratings assigned by rating agencies like CRAB to arrive at risk weights and thereby compute capital requirements. Based on this BB requirement, banks will require their prospective borrowers (and customers for nonfund-based facilities) to get them or their facilities rated. Some banks may also provide incentives (such as lower interest rates for loans) to higher rated companies/facilities, sharing the capital savings on such exposures.

12. What about foreign currency loans and external commercial borrowings (ECBs)? Will CRAB also rate these?
According to the new framework, risk weights on banks' exposure to resident corporates, irrespective of the currency of exposure, will be calculated based on ratings assigned by domestic rating agencies such as CRAB. Accordingly, CRAB will assign ratings for foreign currency loans taken by resident corporate from Bangladeshi banks or foreign banks based in Bangladesh. Under the new framework, risk weights on banks' exposures to non-resident corporate will be calculated based on ratings from global rating agencies such as Standard & Poor's.

7. Is a rating required before a company can get a loan sanctioned, or to renew its working capital facilities?
Rating is not a pre-requisite for a loan sanction or for renewal of working capital facilities. However, a bank could insist on a rating for the borrower and loan/facility before sanction/renewal, as it would help the bank in saving capital and also provide an additional input for the bank in deciding on the terms of the loan.

13. If a company's non-convertible debentures are rated, can the same rating be used by banks for all exposures to the company?
Under the new framework, in circumstances where the borrower has a specific assessment for an issued debt, the rating applicable to that debt may be applied to the bank's unrated claims for capital relief only if: > The bank's claim ranks pari-passu with, or is senior to, the specific rated debt in all respects, and > The bank's claim has a maturity that is not later than the maturity of the rated claim. In case of short-term exposures, the risk weight to be used for the unrated claim will be one category higher than the risk weight for the rated claim.

8. How long will CRAB take to rate a company/bank loan?

From the day it receives a written request for a company or bank loan rating, along with all information required for the analysis, CRAB will take three to four weeks to complete the exercise. If CRAB has already rated another company/facility belonging to the same group/entity, the incremental effort involved in the analysis would be minimal and hence the assessment could be carried out much faster.

9. Will CRAB rate every entity of a group (every bank facility in case of loan rating) separately?
CRAB will assign individual ratings to each entity of a group in case of entity rating. In case of bank loan rating or facility rating, the rating will also be for individual facility. The validity of each rating will be linked to the tenure of the rated facility.

14. Does a corporate have the option to accept the rating?

The company has the option to accept or not accept the rating assigned. Once the rating is accepted, CRAB will issue a rating letter to the borrower, issue a press release for the rating, post it on its website, and carry it in its ratings publications. Only ratings that are available in the public domain can be used by banks for calculating risk weights.

10. In case of consortium/ syndicated lending, does the borrower need to take a separate rating for each banker?
A company that has borrowed from a consortium of lenders can get the entire loan amount or facility rated by CRAB at one go; a rating letter issued for the entire facility can be submitted to all the banks in the consortium.

15. If the corporate does not accept the rating, will CRAB share the rating with the bank?
Only after the company accepts the rating, it will be publicly released and shared with the bank.

11. Should a company also get its non-fund-based limits rated by CRAB?
Under the new framework, banks will have to provide capital on both fund-based and non-fund-based exposures. However, the capital requirements on non-fund-based exposures are lower than the capital requirements on fund-based exposures of a similar magnitude. Hence, banks may initially focus on ensuring that their fund-based exposures are rated, to maximise their capital savings.

16. What information are required from Client while rating? What about the confidentiality of these information?
CRAB would require information relating to financial position (balance sheet, income statement etc.), operations, management, owners, sister concerns, banking relations, suppliers & buyers, machinery, market, competition, sister concerns etc. The information collected from client will be kept confidentially and will be used only for rating. The full rating report will be given only to client. A brief rating rationale highlighting the determinants of the rating will be published once the rating is accepted by client.

17. How long will a rating be valid?

Initial rating of a company (entity) will usually be valid for one year. In case of loan rating the long term ratings will be valid for one year, while the short term rating validity will be for 6 months or shorter in-case of an exposure with shorter maturity.

Services of CRAB
A. RATING SERVICE
Entity / Issuer Rating:
Banks and Financial Institutions Insurance Companies (General & Life) Corporate (Public & Private)

Instruments Rating:
Debt Instruments (Bonds, Debentures, Pref. Shares etc.) Structured Finance / Securitizations Project Loans / Syndicated Loans Lines of Credit Equity Instruments (IPO, Rights) Mutual Funds Other Instruments

Client Rating for Banks / Financial Institutions State Owned Entities Micro Finance Institutions Small & Medium Enterprises (SME) Other Organizations / Entities

B. C. D.

GRADING SERVICE ADVISORY SERVICE INFORMATION SERVICE

CREDIT RATING AGENCY OF BANGLADESH LTD. Head Office

Sena Kalyan Bhaban (SKB), 195 Motijheel C/A Floor # 4, Suite # 403, Dhaka 1000, Bangladesh Phone: 8802 9571497, 9571238, 7175368, Fax: 8802 9563837 Email: info@crab.com.bd

Chittagong Liaison Office

C&F Tower (4th Floor) 1222 Sk. Mujib Road, Agrabad C/A, Chittagong Phone: 01973032807, Fax: 880-31-2516694 Email: ctg@crab.com.bd

www.crab.com.bd