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What is Risk Rating?
February 11, 2009
10:00 to 11:00
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What is Risk?
Means danger, a peril, an uncertainty, a threat, a probability.
Is the adverse effect on profitability of distinct sources of uncertainty.
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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.
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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!
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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
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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.
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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.
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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.
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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
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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
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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
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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
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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
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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
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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
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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
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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
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Thank you!