What is Risk Rating?
February 11, 2009
10:00 to 11:00
What is Risk?
Means danger, a peril, an uncertainty, a threat, a probability.
Is the adverse effect on profitability of distinct sources of uncertainty.
Requirements for Risk Management
All risks generate potential losses;
Risks need to be identified in order to measure, monitor and control them
Risk management requires a set of tools and techniques, management processes and organizational design to identify, monitor, measure and control them.
Risk management requires:
A set of tools and techniques, Management processes; and Organizational design
to identify, monitor, measure and control
risks.
Now, the call of the times is for RISK-BASED LENDING!
What is default?
Past due more than 90 days Bankruptcy Failure to pay the loan balance Bank estimates that the client is unlikely to pay
its obligations. Other industry-specific definitions
Analyzing & measuring risks - BRR & FRR System
Basel II recommends a two-tier rating system – one that uses BRR-Borrower Risk Rating and FRR – Facility Risk Rating.
Involves qualitative and quantitative evaluation.
A Proven Working Model: SB’s BRR System A tool to systematically assess the risk
factors involved in a business applying for a loan.
There are clear guidelines & definition of terms.
Risk assessment is made on the customer, and then a BRR rating is computed based on the assessment.
Low risk=low probability of default , while high risk = high probability of default.
SB’s Model
The BRR recommended by SBC makes use of CAMP analysis.
CAMP stands for Cash, Management, Marketing and Production.
A scale of 10 is used, where 1 means very low risks and 10 is very high risk and ripe for collection.
SB’s Model Administration:
Experience of owners / management > more than 15 years 5
>15 but not less than 5 years 3 > 5 years 0 5 Owner’s health, age & succession > 50 y/o with succession plan 5 > 50 y/o with no succession plan 3 <50 y/o with succession plan 3 w/ health concerns & succession plan 3 <50 y/o with no succession plan 0 w/ health concerns, no succession 0 5
SB BRR: Administration
Financial capacity of owners/ personal net worth Above 4x the total loans 5 Between 2.1 & 4.0 4 Between 1.0 and 2.0 2 Less than 1 0 Attitude to banks (based on CI) W/ established credit track record of at least 3 years 5 Ltd. track record w/ banks, w/no adverse finding 3 With adverse findings 0 Maximum Points 20
SB BRR: Market
Clients (concentration of sales) No client <10% of sales 7.5 1 client bet.10% to 20% of sales 4 <1 client over 10% or 1 client over 20% 2 7.5 Increase of sales (ave. of last 3 yrs.) > 10% 7.5 > 5% increase not > 10% 5 < 5% or stable 2 Decreasing sales or insufficient data 0 7.5 Maximum points / Sub-total 15.0
SB BRR: Production
Suppliers Concentration No supplier 4 No supplier more than 20% 3 1 supplier bet. 20% & 30% 2 <1 supplier over 20% or 1 supplier over 30% 1 4 Inventory No inventory/ Fast-moving invty. 4 Inventory level acceptable for type of industry 2 Slow-moving inventory/Perishable and/or high tech 0 4
SB BRR: Production
Production/service capacity and potential to increase May accommodate expanded operations 4 Just sufficient for existing market 2 Inadequate for existing market 0 4 Business location (in terms of market & supply Excellent location for type of business 3 Acceptable location for type of business 2 Poor location for type of business 0 3 Maximum Points/Sub-total 15
SB BRR: Cash
Current Ratio (excl. past due ARs and obsolete inventory) Current Ratio > 3 7.5 2 > CR < 3 5 1 < CR < 2 3 CR < 1 0 7.5 Debt-Equity Ratio (DER) DER < 50:50 7.5 50:50 < DER < 67:33 5 67:33 < DER < 75.25 3 DER < 75:25 0 7.5
SB BRR: Cash
Debt-servicing capacity DSC > 2 30 1.5 < DSC < 2 20 1 < DSC < 1.5 10
DSC < 1 0 30 Accounts receivable level
AR < 90 days 590 days < AR < 180 days 3AR > 180 days 0 5
Maximum Points/Sub-total 50 Maximum Points/Total Score 100
SB BRR
Maximum Points/Total Score 100 Bonus Point for BIR FS-Based
Evaluation 3 Final Score
Passing Attained Risk
Mark Mark Quality
Borrower Risk Rating
55-59 62 Fair
Risk
Conversion Table
BRR Description Score Risk Quality
1 Excellent >89 Very low risk
2 Strong 80-89 Low risk
3 Good 70-79 Moderate risk
4 Fair 60-69 Moderate risk
5 Acceptable 55-59 High risk
6 Marginal 50-54 High risk
7 Unsatisfactory 45-49 Very high risk
8 Substandard 40-44 Very high risk
9 Doubtful 35-39 Very high risk
10 Expected loss <35 Very high risk
Thank you!