Limitations of ICRRS

Introduction:

Internal Credit Risk Rating System is a rating scale launched by Bangladesh Bank in 2018, which is used to measure and evaluate credit score of borrowers. It is an extremely important tool used by Banks and other external credit rating companies to highlight the creditworthiness of individual borrowers as well as large corporations.

Importance of ICRRS:

Risk Management: It helps financial institutions manage their credit exposure by accurately assessing credit risk. Banks can use these data to make informed decisions about lending, ensuring they do not extend credit beyond what borrowers can reasonably repay.

Capital Allocation: Proper credit risk assessment allows banks to allocate capital efficiently. They can assign appropriate levels of capital reserves based on the risk exposure of their loan portfolios.

Cost of Funds: Banks raise their funds mainly from depositors. Accurate credit risk assessment ensures that these funds are allocated to the right type of borrowers who are more likely to repay.

Maintaining Liquidity: Default loans can tie up capital and reduce liquidity. Therefore accurate credit risk assessment is required to avoid excessive exposure to non-performing loans, thereby maintaining liquidity to meet depositor withdrawals and other financial obligations.

Better Reputation: A bank's ability to accurately assess credit risk, can enhance its reputation in the market. This can lead to more opportunities for growth and expansion.

Better Customer Relationship: By accurately assessing credit risk, banks can offer better credit terms to customers, thereby fostering long-term relationships based on trust and mutual benefit.

Overall, accurate credit risk assessment forms the foundation of sound banking practices, and can contribute to financial stability and sustainable economic growth.