Credit rating overhaul vital for building trust

October 31, 2023 | 10:08
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Pivotal changes are upcoming in Vietnam’s financial market, with mandated credit ratings for specific corporate bonds from 2024 to boost transparency and diversify investments.
Credit rating overhaul vital for building trust
Credit rating overhaul vital for building trust, Photo: Shutterstock

Vietnam is poised to mandate credit ratings for select corporate bonds starting in 2024, aiming to diversify investment avenues and enhance market transparency, shared FiinGroup CEO Nguyen Quang Thuan at last week’s seminar on the role of ratings in credit risk management.

“Credit ratings are pivotal in building trust within the market. To reduce reliance on bank loans, companies must establish transparent capital market profiles. This necessitates collective effort from regulatory bodies, businesses, banks, and investors alike,” he said.

Thuan also believed that the new regulation will demand more enterprises to adopt credit ratings, thereby broadening investor appeal. “It’s crucial to attract more participants in the bond market and broaden debt instruments. Credit ratings will strengthen investor confidence and diversify long-term economic funding sources,” Thuan added.

Dr. Nguyen Quoc Hung, chairman of the Vietnam Banking Association, underscored the importance of credit ratings in improving market operations.

“They are key to maintaining transparency and fostering sustainable capital and monetary markets,” Hung said. “The role of varied credit ratings also helps investors manage their portfolios according to risk tolerance and investment safety.”

Despite rules being introduced almost 10 years ago on governing credit rating agencies, the uptake of credit ratings in Vietnam remains minimal and non-mandatory, unlike independent audits.

“The low adoption rate among businesses and banks shows a disregard for credit ratings, and without obligatory ratings, investors tend to overlook their importance in decision-making,” Hung insisted.

Le Hong Khang, director of Credit Ratings at FiinRatings, noted that only three firms in Vietnam are licensed to provide credit ratings – FiinRatings, VIS Rating, and Saigon Ratings. This leads to a lack of comparative information on the credit quality of businesses.

“However, the market still lacks diversity in its investor base, standardisation of information, and a benchmark yield curve for interest rate pricing, necessitating the standardisation of investment tools for institutional investors,” Khang said.

He advised that while credit ratings are not compulsory for all, they are vital for guiding investor disbursements, particularly for safer bond investments among insurance firms and pension funds.

“A high credit rating doesn’t guarantee immunity from default, but credit ratings still serve as a key tool in monitoring financial health, facilitating portfolio management, and enhancing market liquidity,” he added.

Discussing the real estate sector, Thuan of FiinGroup observed that not every firm in the industry faces hardships. “It’s essential to evaluate the real conditions of each company and the credit quality across sectors to devise growth-stimulating credit policies,” Thuan explained. “When businesses proactively pursue credit ratings, it provides credit institutions with comprehensive data to assess financial status, debt repayment abilities, and other related risks.”

This insight is crucial for managing credit risk and investing in debt instruments. By having more Vietnamese businesses with credit ratings, institutions can apply international risk management standards, such as Basel III, currently adopted by Vietnamese credit organisations, Thuan added.

Trinh Quynh Giao, CEO of PVIAM, said that a proactive credit rating not only complies with upcoming government regulations but also adds value in the eyes of funds during investment evaluation.

“Ratings act as an initial filter, especially non-professionals, helping them gauge issuing companies and reducing risk. This process is key to restoring trust in the corporate bond market,” Giao said.

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The adequacy of credit ratings is crucial for debt markets everywhere else in the world, including emerging economies like Vietnam. Michael Goh, an international finance expert based in Singapore, discussed with VIR’s Le Luu, the critical role as well as some possible shortcomings of credit rating agencies.

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