CASE STUDY

Secured/ Unsecured SME Loan Portfolio: Asset Valuation, Stress Testing and Lifetime Loss Forecast
Objective
Our client, one of Indias premier financial services conglomerates, had a growing and profitable SME loan portfolio (both secured and unsecured). After three years of cautious growth since inception- putting policies, procedures and best practices in place; the management decided they had a solid platform to go for a steep growth curve. With this context, they wanted an end to end review of portfolio credit quality with the following objectives Credit quality review with respect to future default behavior and recommendations for quality improvement. Portfolio Stress Test Simulator to preempt the effect that macroeconomic stress scenarios would have The stress scenarios were1. GDP Growth Slowdown, 2. Tougher Access to Finance. Lifetime loss Prediction of the existing portfolio.

Methodology
Merged all the business datasets- application data (profile, demographics, financial history of business and promoters etc.), transactional details (payment/ delinquency/ cheque bounce details), product information and other relevant information sources (top-up/ cross-sell etc.) to compile a single view dataset so that each account had a single unique record with all the information related to it.

Case Study | Gmid Associates www.thegmid.com enquiries@thegmid.com | +91 020 4239596

Secured/ Unsecured SME Loan Portfolio: Asset Valuation, Stress Tesing and Loss forecasts Conducted data mining analyses (clustering, segmentation, KDA etc.) to identify trends and patterns in the loss making accounts, if any. Identified pockets of portfolio that were significantly riskier than others. Based on historical default data, developed a behavioral scorecard for default prediction on active portfolio. Developed a survival model to predict lifetime at account level. Combined these two models for the lifetime loss forecast. Basis various portfolio performance analyses, it was found that monthly portfolio performance had a great correlation to account vintage and some macroeconomic parameters. Devised a statistical relationship to correlate portfolio performance (nonpayment behavior) with macroeconomic changes and built this into an easy to use, parameterized Macro enabled MS Excel tool. The tool was to be used by the CEOs office and they wanted an easy to use and parameterized tool. Shared a detailed report regarding portfolio leakages, distress trends and recommendations, Life Time Loss Forecast results along with stress testing tool.

Impact
Management used the inputs to tighten leakages in credit policy, identify areas (i.e. regions/ industries) and parameter cut-offs which were the source of risky acquisitions. This helped the company to solidify the credit foundation and then go for aggressive expansion while making sure portfolio quality doesnt go down. The company was able to increase the monthly portfolio growth rates by 50% and at the same time reduce the default rates (which were already pretty good) by over 10%.

Case Study | Gmid Associates www.thegmid.com| +91 0120 4239596