What are the exceptions to ICRRS?
In general, banks must follow the Internal Credit Risk Rating System (ICRRS) strictly. However, Bangladesh Bank has allowed some exceptions. These exceptions address practical situations where the standard rating process cannot be applied.
Newly Established Companies
A newly established company often has no financial history. In such cases, the bank may prepare the ICRRS using projected financial statements. However, the borrower cannot receive a rating higher than Marginal. Once audited financial statements become available, the bank must reassess the borrower using the actual financial data.
Rating Substitution for Group Companies
Sometimes a borrower belongs to a large business group. In such cases, the bank may substitute the borrower’s rating with the rating of a corporate guarantor.
The guarantor must be a performing concern within the same group or holding company. The guarantee must be legal, irrevocable, and unconditional.
The bank must also complete a full ICRRS assessment of the guarantor. This ensures that the guarantor has the financial capacity to support the borrower if required.
Outdated Financial Statements
Normally, banks should not use financial statements that are more than 18 months old. However, genuine delays may occur. In such cases, the bank may use the outdated audited financial statements.
The borrower must also submit an up-to-date unaudited financial statement. Even then, the borrower cannot receive a rating higher than Marginal.
Downgrade Due to Unexpected Events
Some important events may occur after the balance sheet date. These events do not appear in the audited financial statements. However, they may significantly affect the borrower’s business or repayment capacity.
Examples include the death of a key sponsor, a prolonged factory shutdown, deterioration in interim financial performance, changes in tax regulations, heavy debt-funded expansion, or a merger or acquisition. In such situations, the bank must downgrade the borrower’s rating to reflect the increased risk.
Proprietorship and Partnership Concerns
Proprietorship and partnership businesses are not legally required to prepare audited financial statements. Therefore, the bank may use unaudited financial statements for ICRRS.
However, the bank must verify the information carefully. It should review bank statements, sales collection patterns, stock levels, receivable positions, peer comparisons, and other outstanding liabilities before assigning a rating.
Multiple Lines of Business
Some borrowers operate in more than one business sector. In such cases, the bank should identify the sector that generates the highest revenue. The bank should use that sector as the basis for preparing the ICRRS.
Minimum Standard Only
The ICRRS guideline provides only the minimum standard for credit risk assessment. Banks may develop more advanced internal credit rating models. The model may vary depending on the bank’s size, risk profile, and business complexity.
Credit Operations & Management, Module: B, 99th Exam 2(c)
