Large Corporate

Credit Risk Rating

Model

Presented by:
Dhiraj Shrikhande

Deepak Kumar Dohre

Yogesh Kumar Thakker

Credit Risk: Definition & Need of

Credit Risk Rating
The risk of default by borrower due to inability and/or
unwillingness to repay his debts in accordance with the
agreed terms and conditions
Helps in
taking prudent credit decisions

Whether to lend or not

Risk mitigants
Frequency of renewal and Monitoring

Setting Terms and Conditions:

Price
Maturity
Form of Credit

Competitive Advantage

Credit risk ratings eventually help a bank to assign a

probability of default for borrower according to its risk
category

Sources for Capturing Signals of

Credit Risk
Financials
Business Performance
Industry Outlook
Quality of Management
Conduct of account

Financial
Risk

Business
Risk

Management
Risk

Conduct of
Account

40%

25%

25%

10%

Aspects evaluated
-Growth
-Profitability
-Solvency
-Cash flows adequacy
-Liquidity
(24 Parameters)

Aspects Evaluated
-Operating efficiency
-Operating leverage
-Market Position
(12 Parameters)
Key success factors

Aspects evaluated
-Achievement of targets
-Track Record
-Quality of personnel
-Integrity, commitment
-Industrial relations
-Capital Market
perception
-Ability to infuse capital
(9 Parameters)

Preventive monitoring
index
-PMS ranking ranges
from 1 to 10
-Larger ranks indicate
Bad accounts

Financial Risk Evaluation : Past

Financials
Category

Parameter

PAST FINANCIALS - INDUSTRY COMPARISON

Growth Rate (3 yr)

Gross Sales growth rate (%)

Profitability

OPBDIT/Sales (%)

Efficiency

Short term bank borrowings/ Net sales (%)

Cash Flows

Operating cash flow/ Total debt (%)

Net operating cash flow/ Total debt (%)

PAST FINANCIALS - ABSOLUTE COMPARISON

Solvency

Debt equity ratio

TOL/TNW

Liquidity

Current Ratio

Debt Coverage

Interest coverage
DSCR

Profitability

Return on capital employed (%)

Financial Risk Evaluation: Future Risk

The expectation of future financial risk is an important input to
the credit rating process. This is used to evaluate the cash flows
of a company as well as any major risks, which the company
might be facing in future that may adversely impact its financial
performance.
FUTURE RISK Subjective
1. Impact of contingent liability
2. Foreign Transaction risk
3. Impact of merger/de-merger/expansion on key financials
4. Cash flow adequacy
5. Impact of diversion on future financials

Financial Risk Evaluation :

Discounting Factors
SUBJECTIVE ASSESSMENT OF FINANCIALS
1. Transparency in accounting
2. Quality of inventory
3. Realisability of debtors
4. Quality of investment/ advances made to group/ other companies
TREND ADJUSTMENT
1. Net sales
2. PBDT less Non recurring income/expenditure
3. Operating cash flow/ Total debt
4. Tangible net-worth

Business Evaluation : Operating Efficiency

OPERATING EFFICIENCY PARAMETERS (Industry Comparison)
5 most relevant factors to be selected
MANUFACTURING SECTOR

SERVICE SECTOR

Operating leverage*

Operating leverage*

Inventory Turnover

Operating income/Op. Assets

Net Sales/Current Assets

Wages/Operating income

Net Sales/ Operating Assets

Other Operating cost/ Operating income

Administrative & selling expenses /Operating

income

5
Raw Material/Cost of Production
6

Wages/Cost of Production

Credit period allowed

Power Cost/Cost of Production

Credit period availed

Administrative and Selling Expenses/Net Sales

Cost of Goods Sold/Net Sales

1
0

Credit Period Allowed

1
1

Credit Period Availed

* - COMPULSORY

Business Evaluation : Subjective

evaluation
MANUFACTURING SECTOR
Parameters

Sub-Group
1. Competitive Position

Expected sales growth

Market dominance
Trend in market share
Availability of raw material and other critical inputs
Suppliers power
Availability of alternate raw material/fuel

2. Input Related Risk

Management of price volatility

Reliable vendor base for components
Dependence on imports
Proximity to raw material sources
Status of backward integration

Business Evaluation : Subjective

evaluation
MANUFACTURING SECTOR contd
Parameters

Sub-Group
Capacity Utilization

State of technology used

3. Production Related
Risk

Flexibility in product manufacturing

Patents and proprietary technology
R&D Expenses
Dependence on single manufacturing plant
Product range

4. Product Related Risk

Product quality
Highly customized product
Threat of substitution/ obsolescence

Business Evaluation : Subjective

evaluation
MANUFACTURING SECTOR contd.
Parameters

Sub-Group
Economies of scale
Brand Equity
5. Price Competitiveness

Pricing Flexibility
Financing edge over competitors
Buyers power
Selling & distribution network
After sales & service network

6. Marketing

Geographical diversity of market

Proximity to market
Long term contracts / assured off take
Advertising / other promotional strategies

Business Evaluation : Subjective

evaluation
MANUFACTURING SECTOR contd.

Sub-Group
7. Others

Parameters
Threat from environmental factors
Vulnerability to event risk
Regional rating of states

Business Evaluation : Subjective

evaluation
SERVICE SECTOR
Parameters

Sub-Group
Occupancy/ Utilization rate
Quality of services offered
1. Service Related
Factors

Range of Services
Customer's Perceived value
Level of customer satisfaction
Service features & Packaging of allied benefits
Level of standardization & homogeneity of services
Ambience of service outlet & accessibility to desired service
Distribution Channels/ Supply Chain

2. Market Related
Factors

Effectiveness of distribution channels on target customers

Extent of customer base/ customer's loyalty
Tie up arrangements/ Joint venture/ Franchise
Advertising/ other promotional strategies

SERVICE SECTOR contd

Parameters

Sub-Group

Economies of operations
3. Price
competitiveness

Brand Equity/ Image of company

Pricing flexibility
Ability to extend credit
Expected Market growth

4. Competitive
Position

Core competency
Market segment/ Niche area
Locational advantage/ delivery of services
Market dominance

Business Evaluation : Subjective

evaluation
SERVICE SECTOR contd
Sub-Group

Parameters
Quality of basic infrastructure

5. Infrastructure
available

Attitude & skills of employees

Agency/ back up arrangements
Internal Systems & Procedures
Technology adopted in the processes

Business Evaluation
Industry Scores:
The Industry Scores are an indicator of the future outlook of that
industry.
The Risk Management Division (RMD), Head Office is providing the
Industry Score for all major industries.
They are used to augment/discount the Business scores.
Unrated industries are awarded neutral scores.

Management Evaluation
Parameter
MANAGEMENT OBJECTIVE
1

Gross sales achievement vis--vis target

PBT achievement vis--vis target

MANAGEMENT SUBJECTIVE
1

Management Set-up and Corporate Governance

Commitment and sincerity

Track record in execution of projects

Track record in debt repayment

Track record in Industrial relations

Financial strength/ flexibility /Group support

Capital market perception

Conduct of Account
The conduct of account provides useful indications about the ability and
willingness of the borrower to meet his obligations. The manner in which a
borrower has been conducting his accounts in the past is a good indicator of how
the account is likely to behave in future as well.
CONDUCT OF ACCOUNT EVALUATION
1

Preventive Monitoring System rating

OR

Status of account

Operations in account

Submission of financial data/ statements

Rating Categories & Grades

Rating Category

Risk Profile
(Description)

PNB AAA

Minimum Risk

PNB-AA

PNB-A

PNB-BB

PNB-B

Marginal Risk

Modest Risk

Average Risk

Marginally
Acceptable Risk

PNB-C

High Risk

PNB-D

Caution Risk

Score
Obtained

Grade within
the rating category

Above 80.00

PNB- AAA

Above 77.50 up to 80.00

PNB- AA +

Above 72.50 up to 77.50

PNB- AA

Above 70.00 up to 72.50

PNB- AA -

Above 67.50 up to 70.00

PNB- A +

Above 62.50 up to 67.50

PNB- A

Above 60.00 up to 62.50

PNB- A -

Above 57.50 up to 60.00

PNB- BB +

Above 52.50 up to 57.50

PNB- BB

Above 50.00 up to 52.50

PNB- BB -

Above 47.50 up to 50.00

PNB- B +

Above 42.50 up to 47.50

PNB- B

Above 40.00 up to 42.50

PNB- B -

Above 30.00 up to 40.00

PNB- C

30.00 and below

PNB D

THANK YOU