By Wayne Dass, CFA
Chief Executive Officer
Caribbean Information and Credit Rating Services Limited (CariCRIS)
CariCRIS’ is pleased to report that its February 24-27 inaugural Credit Risk Workshop in Guyana held at the Pegasus Hotel was – based on feedback received from the attendees – a successful and value-adding exercise. Participants in the exercise included representatives of the major commercial banks in Guyana, the Bank of Guyana and the recently established Credit Bureau. I believe that participation in the workshop has better positioned participants to understand the fundamentals of credit risk analysis and credit ratings, the methodologies and criteria for assessing the credit risk of countries, banks and other financial institutions, insurance companies, and manufacturing and retail/distribution companies.
The theory behind these credit risk frameworks was made real and practical through the use of case studies in which the participants were required to conduct credit risk assessments of actual Caribbean countries and companies and present their final ratings for critique by the course facilitators, who are experts in regional credit rating assessments.
The outcomes of the workshop suggest that there is scope for additional training and I wish to signal the company’s interest in moving in that direction. Our focus will be in the areas of Small and Medium (SME) credit risk analysis, risk management, portfolio management and financial ratio analysis.
During my short stay in Guyana I met with some private sector entities and individuals, and shared with them my vision for the long-term development of the financial and capital markets in Guyana. Additionally, I initiated worthwhile discussions on SME ratings and corporate credit ratings.
SME ratings
Small and medium enterprises are the engine of growth in any economy but particularly so in the Caribbean, where the majority of our businesses can be classified as SMEs. Many SMEs, however, fail to achieve their full potential due to inappropriate funding structures and overly expensive financing. SME credit ratings play a critical role in bridging this gap, by allowing these enterprises to access more appropriate funding at interest rates more reflective of their true underlying creditworthiness.
SME ratings improve their access to funding and financial services by providing greater confidence to lenders. The ratings also provide faster processing of credit facilities as rating reports supply most of the information needed for loan decision-making. Most importantly, SMEs can leverage their ratings to lower their borrowing costs. SMEs can also use their ratings to build credibility with other counterparties such as technology providers, suppliers and new prospective clients. They can also serve as excellent diagnostic tools for SME management, allowing them to benefit from best practices imparted by rating experts with an in-depth knowledge of their sector.
Corporate credit ratings
CariCRIS’ credit rating of banks, non-bank financial institutions, credit unions and insurance companies can be a valuable tool to assist the regulators of these entities in their supervision and monitoring efforts. Moreover, modern financial sector regulations are more risk-based and credit ratings serve as an effective measure of credit risk for capital adequacy calculations. Further, in the absence of analytical information about a company’s financial position and corporate strategy, many would-be investors in corporate credit markets stay within the confines of the relative comfort (and lower returns) of the banking system or the government securities markets. By virtue of enabling investors to easily compare credit risk across companies, industries and countries, credit ratings deepen the capital market by attracting more investors into the corporate bond market.
From the perspective of corporates trying to raise funds, credit ratings enable them to access funds from a wider range of instruments (ie not only bank loans) as well as reduce information risk, both of which should result in more efficient pricing. This reduces the cost of capital and allows a larger number of projects to be economically viable, thus increasing the rate at which the overall economy can grow. On account of a greater number of projects being funded, credit ratings also improve the liquidity of a bond market. Inefficiencies typically inherent in any banking system such as high operating costs, the management of non-performing loans and the cost of maintaining high reserve requirements at the central bank are usually less prevalent in capital markets.
Finally, credit ratings reduce informational asymmetry, not only via the information contained in the credit rating symbols assigned to various instruments, but also by supporting greater financial disclosure, better corporate governance and improved access to publicly available expert analysis.
Greater information disclosure and improved liquidity also deepen the market by attracting money that would otherwise have been placed off-shore, which may not be as productive to the economy as investments in the real sector (manufacturing/services). Greater participation overall in the financial markets enables a government to have more flexible and arguably more effective monetary policies.
Based on the outcomes of my meetings in Georgetown I expect to return to Guyana in the near future to continue discussions and collaboration with stakeholders on how best CariCRIS can meet the needs of investors, borrowers, intermediaries and regulators in the financial market, all with the aim of improving transparency in the financial market and in building a more resilient financial system leading to sustainable economic growth and development in Guyana.
CariCRIS is the Caribbean’s leading Credit Rating Agency. For more info E-mail: [email protected] or call 868-625-3007.
