credit risk grading
DESCRIPTION
A presentation on Credit Risk Grading as a part of course requirementTRANSCRIPT
![Page 1: Credit Risk Grading](https://reader033.vdocuments.us/reader033/viewer/2022051001/55cf9161550346f57b8d1afb/html5/thumbnails/1.jpg)
Credit Risk Grading Model
Tauhidul Islam16071 (BBA)
210 (MBA)
![Page 2: Credit Risk Grading](https://reader033.vdocuments.us/reader033/viewer/2022051001/55cf9161550346f57b8d1afb/html5/thumbnails/2.jpg)
Credit Risk Grading Model• tool for credit risk management • based on the pre-specified scale, it reflects the
underlying credit-risk for a given exposure
DEVELOPMENT OF THE SCORE CARD
Lending Risk
Analysis1993
Risk Grade Score Card
2003Credit Risk
Grading2005
![Page 3: Credit Risk Grading](https://reader033.vdocuments.us/reader033/viewer/2022051001/55cf9161550346f57b8d1afb/html5/thumbnails/3.jpg)
Functions of CRG Model
Promote safety
Measure Risk
Allow Monitoring
optimize returns
![Page 4: Credit Risk Grading](https://reader033.vdocuments.us/reader033/viewer/2022051001/55cf9161550346f57b8d1afb/html5/thumbnails/4.jpg)
Use of CRG ModelCR
G M
atrix
uniform standards to assess the Credit
relevant for individual credit selection & loan pricing
relevant for surveillance and monitoring
![Page 5: Credit Risk Grading](https://reader033.vdocuments.us/reader033/viewer/2022051001/55cf9161550346f57b8d1afb/html5/thumbnails/5.jpg)
Number & Short Name of Grades in CRG
GRADING SHORT NAME NUMBER
Superior SUP 1
Good GD 2
Acceptable ACCPT 3
Marginal/Watch list MG/WL 4
Special Mention SM 5
Sub standard SS 6
Doubtful DF 7
Bad & Loss BL 8
![Page 6: Credit Risk Grading](https://reader033.vdocuments.us/reader033/viewer/2022051001/55cf9161550346f57b8d1afb/html5/thumbnails/6.jpg)
Process of Risk Grading
1.• Identifying All the Principal Risk Components
2.• Allocating Weightages to Principal Risk Components
3.• Establishing the Key Parameters
4.• Assigning Weight to Each of the Key Parameters
5.• Inputting Data to Arrive at the Score on the Key Parameters
6.• Arriving at the Credit Risk Grading based on total score obtained
![Page 7: Credit Risk Grading](https://reader033.vdocuments.us/reader033/viewer/2022051001/55cf9161550346f57b8d1afb/html5/thumbnails/7.jpg)
Step 1: Identifying Principal Risk Components
![Page 8: Credit Risk Grading](https://reader033.vdocuments.us/reader033/viewer/2022051001/55cf9161550346f57b8d1afb/html5/thumbnails/8.jpg)
Step-2: Allocating Weightages to Principal Risk Components
Principal Risk Components: Weight:
Financial Risk 50%
Business/Industry Risk 15%
Management Risk 15%
Security Risk 10%
Relationship Risk 10%
![Page 9: Credit Risk Grading](https://reader033.vdocuments.us/reader033/viewer/2022051001/55cf9161550346f57b8d1afb/html5/thumbnails/9.jpg)
Step-3: Establishing the Key Parameters
Principal Risk Components: Key Parameters:
Financial Risk Leverage, Liquidity, Profitability & Coverage ratio.
Business/Industry RiskSize of Business, Business Outlook, Industry Growth, Competition & Barriers to Business (entry/exit)
Management Risk Experience, Succession & Team Work.
Security Risk Security Coverage, Collateral Coverage and Support
Relationship RiskUtilization of Limit, Account Conduct, Compliance of covenants/conditions & Personal Deposit
![Page 10: Credit Risk Grading](https://reader033.vdocuments.us/reader033/viewer/2022051001/55cf9161550346f57b8d1afb/html5/thumbnails/10.jpg)
Step 4: Assigning Weightages to Each of the Key Parameters
Principal Risk Components: Key Parameters: Weight:
Financial Risk
Liquidity 15%Profitability 15%Coverage 5%Total 50%
Principal Risk Components: Key Parameters: Weight:
Business/Industry Risk
Size of Business 5%
Business Outlook 3%
Industry growth 3%
Market Competition 2%
Entry/Exit Barriers 2%Total 15%
![Page 11: Credit Risk Grading](https://reader033.vdocuments.us/reader033/viewer/2022051001/55cf9161550346f57b8d1afb/html5/thumbnails/11.jpg)
Principal Risk Components: Key Parameters: Weight:
Management Risk
Experience 5%
Succession 5%
Team Work 5%Total 15%
Principal Risk Components: Key Parameters: Weight:
Security Risk
Security coverage 4%
Collateral coverage 4%
Support 2%Total 10%
Principal Risk Components: Key Parameters: Weight:
Relationship Risk
Utilization of limit 3%
Account conduct 3%
Compliance of covenants
/condition2%
Total 10%
![Page 12: Credit Risk Grading](https://reader033.vdocuments.us/reader033/viewer/2022051001/55cf9161550346f57b8d1afb/html5/thumbnails/12.jpg)
CRG based on total score obtained
No. Risk Grading Short Name Score
1 Superior SUP 100% cash covered
Government guarantee International Bank guarantees
2 Good GD 85+
3 Acceptable ACCPT 75-84
4 Marginal/Watch list MG/WL 65-74
5 Special Mention SM 55-64
6 Sub-standard SS 45-54
7 Doubtful DF 35-44
8 Bad & Loss BL <35
![Page 13: Credit Risk Grading](https://reader033.vdocuments.us/reader033/viewer/2022051001/55cf9161550346f57b8d1afb/html5/thumbnails/13.jpg)
Different Ccategories of Credit Risk Grading
• Credit facilities, which are fully secured i.e. fully cash covered.• Credit facilities fully covered by government guarantee or guarantee of
a top tier international Bank.
Superior – (SUP) – 1
• Strong repayment capacity, excellent liquidity and low leverage• consistently strong earnings and cash flow.• Credit facilities fully covered by the guarantee of a top tier local Bank.
Good – (GD) -2
• not as strong as GOOD Grade borrowers, but still demonstrate consistent earnings, cash flow and have a good track record.
• Credit in this grade would normally be secured by acceptable collateral
Acceptable – (ACCPT) -3
![Page 14: Credit Risk Grading](https://reader033.vdocuments.us/reader033/viewer/2022051001/55cf9161550346f57b8d1afb/html5/thumbnails/14.jpg)
• an above average risk due to strained liquidity, higher than normal leverage, thin cash flow and/or inconsistent earnings.
• Weaker business credit & early warning signals of emerging business credit detected
• The borrower incurs a loss• Loan repayments routinely fall past due
Marginal/Watch list – (MG/WL) -4
• potential weaknesses that deserve management’s close attention• Severe management problems exist• Facilities should be downgraded to this grade if sustained deterioration in
financial condition is noted (consecutive losses, negative net worth, excessive leverage),
Special Mention – (SM) -5
• Financial condition is weak and capacity or inclination to repay is in doubt.• These weaknesses jeopardize the full settlement of loans.• Bangladesh Bank criteria for sub-standard credit shall apply.
Substandard- (SS) – 6
![Page 15: Credit Risk Grading](https://reader033.vdocuments.us/reader033/viewer/2022051001/55cf9161550346f57b8d1afb/html5/thumbnails/15.jpg)
• Full repayment of principal and interest is unlikely and the possibility of loss is extremely high.
• However, due to specifically identifiable pending factors, such as litigation, liquidation procedures or capital injection, the asset is not yet classified as Bad & Loss.
• Bangladesh Bank criteria for doubtful credit shall apply.
Doubtful- (DF) – 7
• Credit of this grade has long outstanding with no progress in obtaining repayment or on the verge of wind up/liquidation.
• Prospect of recovery is poor and legal options have been pursued.• Proceeds expected from the liquidation or realization of security may be
awaited. The continuance of the loan as a bankable asset is not warranted, and the anticipated loss should have been provided for.
• Bangladesh Bank guidelines for timely write off of bad loans must be adhered to. Legal procedures/suit initiated.
• Bangladesh Bank criteria for bad & loss credit shall apply.
Bad/Loss- (BL) -8
![Page 16: Credit Risk Grading](https://reader033.vdocuments.us/reader033/viewer/2022051001/55cf9161550346f57b8d1afb/html5/thumbnails/16.jpg)
Limitations of CRG Model:
Biasness
Manipulation of information
Complex procedure
Personal Judgement
Same weight for all types of organization
Efficient Employee needed
Static Analysis
![Page 17: Credit Risk Grading](https://reader033.vdocuments.us/reader033/viewer/2022051001/55cf9161550346f57b8d1afb/html5/thumbnails/17.jpg)
Limitatiosn of CRG Model:
Biaseness
Manipulation of Information
Complex Process
Highly efficient Employe
Personal Judgment
Static Study
Equal Weight for all organization