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CM-UNIT-2.b.1
CM-CREDIT RISK RATING
• OBJECTIVES for this unit is to understand:
• What is Credit Rating
• Importance of Credit Rating,
• its purpose
• Methodology to calculate
• Internal & external Credit Rating
CM-CREDIT RISK RATING
• INTRODUCTION
• Banks face various types of risks-financial &
non financial Risk
• Credit Risk, Market Risk, Operation Risk,
Liquidity Risk, Reputation Risk, etcCredit Risk
– a major Risk, Regulatory Risk, etc.
CM-CREDIT RISK RATING
• WHAT IS CREDIT RATING
• Grade attributable to a borrower to measure its
sbility to make repayment of the loan.me
• The risk can be high or low depending on a
specific time when the rating is done.
• Credit Rating helps in taking lending decision
• CIBIL gives Credit Rating
• Applicants with better rating likely to get loans.
• Two different projects of same borrower can
have different Rating.
CM-CREDIT RISK RATING
• HOW RATING HELPS
• Accepting or rejecting a Credit proposal
• To determine pricing
• To determine overal assessment of a bank’s
credit portflio
• Rating of debt instruments for the benefit of
investors.
CM-CREDIT RISK RATING
• INTERNAL & EXTERNAL RATING
• Internal models developed by banks
• External agencies include:
• Brickworks Rating India Pvt. Ltd.
• CRISIL
• ICRA
• CARE
• SME Rating Agency Pvt. Ltd. – SMERA
• Moody’s, Standard & Poor, Fitch,
CM-CREDIT RISK RATING
• SLMPLE MODEL OF CREDIT RATING-For a
medium Enterprise, following financial ratios
are calculated to measure financial strength:
• Current Ratio
• TOL/TNW - DER
• Interest Coverage Ratio (ICR}-PBDIT/Interest
• PAT/Net Sales
• ROCE
• Inventory + Receivables/Sales – No: of days
CM-CREDIT RISK RATING