Credit Rating - An Effort to Enhance Market's Transparency

In the article of the previous issue we analysed the impact by Merrill Lynch’s reports on Vietnam’s stock market in the last time. One among factors making the impacts is information lack, assymmetrical information, and transparency lack on the market. In this article, we will discuss in details efforts to make the market more transparency, to make the market operate more effectively; protect small investors from market’s abuse of big investors and organisations.

 

One among most tough issues that small and individual investors face is accessibility and process of information. Even in today’s epoch of information technology, because stock market is high sensibility on information, slow information access or bad process of information may cost highly. In first days of stock market operations, rumours such as fire of one machines’ unit in Heat Power Plant PhaLai, the director to testify on requirement by the police, the chief executive officer had gone away with hundreds of VND and so on, make many investors puzzled, sell their shares in hurry and suffer big losses. In addition, events of unfair making price, creating false demand through illegal tricks make many inexperienced investors that run on common trend suffer big losses.

 

Recently many investors have said about the negative state of several securities companies which play role as adviser for investors and at same time as organisation investor. Their advantages on transaction skill, time, and moments to enter orders make the stock exchange lack equality. The trouble issue currently still lacks any effective treatment. This belong to essential of information assymmetry between players with better information (listed companies, big investors) and players with less information (small and individual investors) that leads to inequality between the market makers.                            

Based on the essential mentioned above, creation of companies specialised in supplying market information on parameters that have good features such as simplicity, easy access, correct and independent is extreme necessary. One among these kinds of companies is the organisation having the function to define ranks of credit for companies.

 

Credit rating for companies has generated in stock market, and had long-standing history. Term “credit rating” had been used firstly 100 years ago as Company Moodys delivered regularly the parameters on companies’ credits in American’s Train Industry. At present, it begins getting the concern from Vietnamese companies. In accordance with these demands, world organisations such as World Bank, Asian Development Bank have proposed State Bank of Vietnam to create and set up the organisations of this kind.

 

According to definition widely accepted, company’s credit rating is conclusions on company’s ability to fulfill financial liabilities. The conclusions focus on appraisal of ability and expectations that the company will fulfill financial commitments due to pay. This credit rating certainly does not mean any recommendation on purchase, selling, or holding any particular stock. It is also not the comment on relevance of investment by any particular investor. But it supplies the overview on the company’s state, in short term and long term.

 

System of credit ratings is occasionally ranked in accordance with international rules. In general, it includes 10 ranks of credit ratings from AAA, AA, A up to C and D. The system of credit ratings for companies must ensure the features such as objectivity, independence, science and openness.

 

In general, procedure of credit ratings is built on the analysis of quality and quantity aspects, that to be done with appraisal made by scientists and experts in every relevance area. System of credit ratings for companies is relied on grades for the information parameters appraised on quality and quantity aspects. Ranking is not limited in appraisal of financial parameters, it also includes appraisal of non-financial ones, for example, examination of company’s operation environment, forecasts on company’s competitiveness, work of directors’ board, company’s strategy and impacts from outside.

 

Quality analyses occasionally include parameters on the industry’s risk, competition environment, company’s position, management level, ownership diversification and structure, ability to raise capital, and quality of financial information.                        

 

Quantity analyses focus on company’s policies on business, financial targets. They are used to analyse the trends and compared with rivals and the industry’s average. 

 

Today in Vietnam, several companies of credit ratings have been set up and have gone into operation, among which there are Credit Information Center (CIC), Vietnamnet Solution (VASC), and Credit Rating Vietnam (CRV). CIC has done the ranks for 78 listed companies, that has showed the efforts of Vietnamese companies. Although this is the new area in Vietnam and it takes time to have good appraisal from investors, but it expresses big efforts to bring the healthy and transparency for Vietnam’s economy in general and for Vietnam’s stock market in particular.