Credit rating agencies play an important role in financial markets. Through their opinion, the market can have an objective view of the solidity of financial institutions and their ability to meet their obligations.
During 2023, Latin America went through a complex economic context, characterized by low economic growth (2.2%), high inflation, and still high interest rates. This has had a strong impact on various financial institutions in the region, due to the increase in delinquency and credit provision expenses, affecting their sustainability.
An example of the above is the recent
liquidation of Caja Raíz in Peru, the
largest Rural Savings and Credit
Box in the country (with total assets of US$311
million), which was intervened
for insolvency in June 2023. Among
the reasons that led to its closure
were the sharp decline in equity
(-70.3% in the previous 12 months)
and the reduced levels of solvency,
reaching an extremely low capital
ratio (1.94%, when the
ideal is to be above 10%).
As a consequence, 3.7%
of savers cannot recover the
100% of their savings because they
exceeded the coverage of the Deposit Insurance Fund,
leaving them only to wait for the liquidation of the
assets to attempt to recover part of their
money.
It is in this context where the role of
the credit rating agencies becomes more
relevant, since in the face of uncertainty in
the market, investors find themselves in the
need to redirect their investments towards
entities and assets of lower risk. In
turn, informed depositors will be able to
place their savings based not
only on the interest rate offered,
but also on the risk of the institution,
so that they choose the one that offers them
greater security without putting at risk
their savings.
However, what ensures that the risk rating is a true reflection of the current situation of the entity?
For this, there are some values that every credit rating agency must have:
-
Independence:
To have the willingness to act freely and with one's own judgments, which do not necessarily align with the vision or interests of some external agents. - Transparency:
Trust is based on the honesty and level of detail of the reports issued by the rating agency, giving external agents certainty that the information shown is reliable and complete - Quality:
The rating agency must strive to provide a quality service with high added value, with accurate and up-to-date information, based on a thorough analysis of the entity. - Integrity:
Focus on always doing the right thing, prioritizing the previous values over one's own or third parties' interests.
In conclusion, it can be stated that the credit rating agencies play an important role in the market, so their responsibility is not limited only to providing an opinion, as this will mark the difference between a safe investment or a potential loss for different investors. In this sense, the agencies have the obligation to meet the demands and expectations that the market has of them, offering a quality rating that is useful both for the evaluated institution and for the different external agents.
Writing:
Diego Vargas
Commercial Head of MicroRate