960407

IBRD opposed to

setting up another

rating agency yet

HASEEB HAIDER

LAHORE: While the Corporate Law Authority has yet to take a decision on the application of Duff and Phelps, World Bank officials have advised the authority that one credit rating company was sufficient in view of the size, potentials and corporate structures of Pakistan's bond market.

A World Bank study mission for Pakistan bond market, sources said, had made the suggestion at a meeting with the CLA Chairman recently, who had sought the views of bank on the possibility of setting up another agency for the emerging bond market in the country.

"Only in India a second rating agency was allowed to operate four years after the establishment of the first one. Similarly, in Malaysia only recently another agency has been allowed after five years. The estimated size of bond market is equivalent of $100 billion and $40 billion, respectively, in the two countries", source added.

The World Bank mission told the CLA chief that regulators were reluctant in other countries to allow more than one agency due to their concerns about the credibility and financial viability of the agencies.

Sources said it was generally believed that in any country where credit rating was a new concept it took 3 to 4 years before the issuers and the investors developed a clear perception of relative risk evaluation as measured by credit ratings. This process would become more complex and difficult if at the initial stage more than one rating agency was allowed to function.

"It would encourage either cutting of fee or lowering of standards by two competing agencies, thereby damaging the credibility", a corporate lawyer said.

The people who support the idea of a second rating agency say that since the PACRA, country's premier credit rating agency, is based at Lahore, a big chunk of corporate industry located in Karachi faces many problems and high cost of rating. "I do not think that it is a valid point as expenses on rating activity constitutes 4 to 5 percent of the corresponding rating fee, which is marginal", a source close to one of the sponsors of the new company told Business Recorder.

To another contention that PACRA would not be able to handle the workload of rating business in the pipeline following the directives by the State Bank and the CLA for non-banking financial institutions and leasing and Modaraba companies intending to issue Certificates of Investment and other investment papers, the source said: "The requirements of the SBP do not stipulate any time frame except for Modaraba and Leasing companies. Hence, it seems more than likely that the SBP would review the requirement and bring it in line with CLA's requirement.

The source said that PACRA had completed 24 rating assignments, while 13 were in process. Despite this limited workload the agency currently has the capacity of 90 ratings on annual basis.

PACRA which has sponsors like IFC, IBCA, Lahore Stock Exchange, has inflows of strength from IBCA which has 40 percent stake, and provides all technical assistance, ensuring rating as per international standard, the source said.