Rules Announced for Setting Up Credit Rating Agencies

EghtesadOnline: The Central Bank of Iran has published rules for the establishment of credit rating firms.

News ID: ۷۸۶۶۷۷

14 July 2021

The companies are required to analyze clients' financial records and provide them reports on the creditworthiness of individuals or corporates by assigning scores on a scale of "very poor", "poor", "average", "good" or "very good", in accord with CBI requirements, the bank's website reported.

Ratings will be decided after assessing the financial performance of the customer within a fixed period plus solvency, ability and willingness to pay. The score will indicate credibility and discipline in meeting debt obligations in a precise manner.

For example, customer deferral in paying small debts, such as  utility bills, will be considered as unwillingness to pay. However, if the default is due to bankruptcy or force majeure, it would suggest insolvency.

Creditworthiness also would be considered via other parameters, namely delays and punctuality regarding maturities, financial wrongdoing, bounced checks and tax commitments.

Rating agencies will have to collect data from provider entities and update their databases as soon as they receive new data.

The CBI has listed names of state bodies that are required to provide data to rating agencies, namely the National Organization of Civil Registration, the judiciary, Ministry of Justice, National Tax Administration, Central Insurance of Iran, Customs Administration, Ministry of Cooperatives, Labor and Social Affairs; Ministry of ICT, National Iranian Gas Company, Ministry of Energy and the Law Enforcement Forces.

The CBI is responsible for providing data about clients' credit records. In March it said it was preparing a credit rating platform for bank customers based on their creditworthiness. The platform is now partially functioning through which customers’ check transactions and loans are processed.

Controls on Lending

The platform will also enable the CBI to detect lending violations by banks. Most banks have been involved in unusually big loans to special customers who have defaulted and are facing corruption charges.

The ratio of non-performing loans to total loans by local banks was 8.5% by end of the third quarter of the last fiscal year (Dec. 2020).

Customer credibility monitoring is in line with measures to improve transparency in the banking industry. In recent years the CBI has introduced rules to improve control over banks and promote transparency of their financial performance. The measures, among other things, help ensure AML measures, curb tax evasion and curtail speculation in financial markets, namely gold and foreign exchange.

The government has considered incentives for providers who work close with rating firms. Failing to provide data to rating agencies will directly impact their budget, according to government rules.

As per the announcement, non-government entities are allowed to apply for CBI license. Authorized firms can collaborate with foreign credit rating companies. Such institutions also can interact with foreign rating firms to assess the creditworthiness of Iranian firms in international markets.