BSP okays banks’ credit rating system

The Bangko Sentral ng Pilipinas (BSP) has approved the guidelines allowing banks to institute their own internal credit rating system and set the minimum standards for rating.

The BSP’s Monetary Board (MB) approved the rules last week which detailed the standards for banks’ internal credit rating, which would improve the internal risk management of banks.

BSP deputy governor Alberto V. Reyes said the minimum requirements were based on a model developed by the Bankers Association of the Philippines (BAP).

However, Reyes said the guidelines only established the minimum requirements, thus banks are still free to use their own more sophisticated mechanics.

Based on the draft circular approved by the MB, reporting on credit risks must include portfolio breakdown by credit grade, major portfolio segments and analysis of realized default rates against expectations.

Reyes said banks are now required to fully document their internal credit risk rating systems, addressing topics such as coverage, rating criteria, responsibilities of parties involved in the rating process, definition of what constitutes a rating exception, parties that have authority to approve exceptions, frequency of reviews and management oversight of the rating process.

The BSP regulations also provided that the rating criteria should reflect an established blend of qualitative and quantitative factors while setting transparent ranges for the quantitative standards based on experience.

"We’ve also required banks to maintain rating histories on individual accounts," Reyes said. "This would include the identity of borrowers and facilities that default, as well as the timing and circumstances of such defaults."

Reyes said banks are further required to retain data on the realized default rates associated with rating grades and ratings migration in order to eventually track the predictive power of the risk rating system.

Under the regulations, the banks’ internal credit rating system should have a minimum of six rating grades for unclassified accounts and four rating grades for classified accounts.

Moreover, Reyes said the rating system should result in a meaningful distribution of exposures across grades with no excessive concentrations on a single rating grade.

"The point of the whole thing is risk management," he said. "It stands to reason that there should be no excessive concentration on any rating grade."

The BSP requires that borrower dimension focus on factors that affect the inherent credit quality of each borrower, while the facility dimension focus on security/collateral arrangements and other similar risk influencing factors.

In rating corporate borrowers with total assets of more than P15 million, only financial statements audited by external auditors accredited by the Securities and Exchange Commission shall be used, starting with the 2005 financial statements.