Credit rating system will be developed to determine the level of risk prevailing in Security issued by companies assessing such companies." So is the commitment made by His Majesty's Government in the Ninth Plan that started in 1997.

The commitment was reiterated in the budget speech for fiscal year 1998-99 in following lines:

"For the institutional development of credit information system and for the purpose of rating credit instruments and borrowers, an autonomous and independent Credit Information and Rating Centre will be established."

And in the budget speech for fiscal year 200-2001 in following way :

"On the initiative of the Nepal Rastra Bank, arrangements for the establishment of a Credit Rating Agency will be started in the coming fiscal year. This will assist in ascertaining the investment risk and developing the capital market."

Despite these commitments, no concrete progress has been achieved till date. So, when Dr. Tilak Rawal, Governor of Nepal Rastra Bank, the central bank of the country, addressing a seminar on "Investment Information and Credit Rating in Nepal" last April, stressed on the need for a credit rating agency in the present financial scenario of Nepal, many did not take the issue seriously. Dr. Rawal had clearly said that the central bank was keen to see such agency established within the current fiscal year. But it does not seem possible that Rawal’s dream will come true as only few days are left for the next fiscal year to begin.

However, there is a positive development going on towards this. According to the Ministry of Finance, preliminary study is under progress with regard to establishment of Credit Rating Agency (CRA) in the country.

Similarly, according to Dr. Yubaraj Khatiwada, Executive Director in Nepal Rastra Bank, interest has been shown by some private institutions for this and some of them have submitted concrete proposals as well.

Meanwhile, Vishal Group Ltd. of Nepal and Investment and Information Credit Rating Agency Limited (ICRA), one of the CRAs of India, have signed a memorandum of understanding to set up a credit rating and information services agency in Nepal. ICRA was incorporated on January 16, 1991 and it first launched its services on August 31, 1991. Vishal Group in association with the ICRA organized a seminar in Kathmandu last April. At the seminar, T.C. Agrawal, Vice Chairman of the Group, said that the agency would be promoted by a broad cross section of investors and, representatives of all major institutional sectors of Nepal.

The need for a CRA in Nepal was strongly felt during the study on Capital Market Development Project II. The same was reflected in the budget speech of the fiscal year 1998/99.

"As CRA rates debt obligations of instruments and/or organization, it is vital for the healthy development of the capital market," says Dambar Prasad Dhungel, Chairman of Securities Board, Nepal, a regulatory body of the country’s securities market.

Dr. Khatiwada too says the establishment of CRA helps for the development of capital market as it will look after the various aspects including credibility, risk analysis and strength of the instrument/institution.

For the general investors the issue has become vital as individually they cannot rate the credibility of the instruments issued by various companies. General investors suffer because of lack of accurate and timely information. That is expected to be solved when there is CRA.

Realizing the need for a CRA, Citizen Investment Trust (CIT) was assigned three year back to do necessary homework for setting up the agency, according to Nandan Hari Upadhyaya, Executive Director of CIT which then prepared an approach paper. It was sent to Securities Board and Nepal Rastra Bank for comments and though the Board sent back the paper with suggestions, Nepal Rastra Bank did not respond. Now, the Central Bank seems to have changed its mind.

It is Manila based Asian Development Bank, which has been stressing for the establishment of CRA in Nepal. The bank has clearly stated in its reports that a CRA is essential for the successful operation of a money and bond market for private issuers.

But according to ADB, the establishment of a CRA is normally a private endeavour, though regulatory requirements have been an important factor.

The ADB warns, "In order for a credit rating agency to be successful in Nepal, it would be necessary for it to serve a broader role than rating only debt securities. In addition to rating private issuers of debt securities, a Nepalese credit rating agency could be used in the administration of prudential regulations and fiduciary standards applied to provident funds, private pension funds, insurance companies, collective investment funds, securities companies, commercial banks and finance companies."

Upadhyaya too says that the would be CRA should look after other relevant issues too.

However, setting up a CRA is not an easy job, experts point out, as many things need to be considered before establishing it. There should be a local sponsor and, as it is highly technical job, importing technical know how and managerial skill is a must. Capable manpower, improvement in disclosure requirements, strong capital base, share ownership of participating companies in CRA, are some of the issues that need to be considered. One mistake by the CRA may create havoc in the economy.

"If the CRA does not perform well or becomes biased, the capital market of the country may collapse," warns Upadhyaya.

Right now, let us wait and watch till a CRA is a actually established.

Though the concept of such an agency is not a new one, many in Nepal may not be familiar with the term "credit rating." The modern rating system dates back to 1909 when John Moody started rating US railroad bonds. Currently four rating agencies, namely Moody’s, Standard and Poor’s, Fitch, IBCA and Duff & Phelps dominate the world market. CRAs have been established in many countries with the assistance of one of these four agencies.

CRA has been defined as "a commercial concern engaged in the business of credit rating of any debt obligation or of any project or program requiring finance, whether in the form of debt or otherwise, and includes credit rating of any financial obligation, instrument or security, which has the purpose of providing a potential investor or any other person any information pertaining to the relative safety of timely payment of interest or principal".

Dr. Y. V. Reddy of India says, "A credit rating may be defined as an opinion of a CRA as to the issuer’s (i.e. borrower of money) capacity to meet its financial obligations to the depositor or bondholder (i.e. lender of money) on a particular issue or type of instrument (i.e. a domestic or foreign currency : short-term or medium or long-term, etc.) in a timely manner. In other words, the rating measures the relative risk of an issuer’s ability and willingness to repay both interest and principal over the period of the rated instrument. To put it differently, rating signifies the default probability of the instrument that is rated."

A report of Asian Development Bank says that a credit rating is an opinion about credit risk, or an assessment of the ability of an issuer of debt securities to make timely payments of principal and interest on a security over the life of the instrument. A credit rating is both a quantitative and qualitative assessment of the credit strength of the issuer.

Credit rating could be of two types, says Dr. Yubaraj Khatiwada, Executive Director of NRB. One is rating of the credibility of the nation for international investors and another is instrument/institution rating. And, Nepal's plan is for the second type.

The first industrial country to be rated was France by Standard and Poor’s in 1959. Moody’s and Standard & Poor’s first rated a nonindustrial country Venezuela in 1997.

In many Asian countries, CRAs have been established with the assistance from the well-known credit rating agency/agencies. In countries like Japan, India, Korea and Indonesia, there are more than one credit rating agencies. For example, India has four, with Credit Rating Information Services of India Limited (CRISIL), established in 1987, being the premier one. Contrary to this, in many countries, there is a trend of establishing single CRA.