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CM-CREDIT RISK RATING

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

Item Ratio range Marks Co’s Ratio Co’s score


Current ratio Over 1.50 20 1.34 16
1.33 – 1.50 16
1.20 – 1.33 12
1.10 – 1.20 8
1 – 1.10 4
Below 1 0
CM-CREDIT RISK RATING

ITEM Ratio range Marks Co’s ratio Co’s marks


TOL/TNW Below 3 20 3.2 16
3 – 3.5 16
3.5 – 4.0 12
4 – 4.25 8
4.25 - 4.5 4
Above 4.5 0
CM-CREDIT RISK RATING

ITEM Range Marks Co’s ratio Co’s marks


PBDIT/Interest Over 3 20 2.4 8
2.50 – 3 10
2 – 2.50 8
1.75 – 2 6
1.50 – 1.75 4
Below 1.50 0
CM-CREDIT RISK RATING

ITEM Range of ratio Marks Co’s ratio Co’s marks


PAT/Net sales Above 15% 20 10% 4
13 – 15% 16
12 – 13% 12
11 – 12% 8
10 – 11% 4
Below 10% 0
CM-CREDIT RISK RATING
• Similar working for other parameters
• Internal models are developed with
- Internal comparison – internal study
- External comparison -industrial study
• With 5 parameters, max. score would be 100
• Then rating can be done
CM-CREDIT RISK RATING

S.No. RATING SYMBOL SCORE REMARKS


1 Highest safety AAA ABOVE 90
2 High safety AA 80 – 90
3 Fairly safe A 70 - 80
4 Moderately B 60 – 70
safe
5 Low safety C 50 – 60
6 Unsafe D BELOW 50
CM-CREDIT RISK RATING
• COMPLEXITIES
• Parameters keep on increasing in models that
are meant for different amounts of loans.
• Broad parameters include: - Past financials,
future potential, Technological parameters,
industry comparison, marketing parameters,
management competence, past conduct of
the account.

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