1. SUMMER INTERNSHIP PROJECT REPORT
SYMBIOSIS SCHOOL OF BANKING MANAGEMENT
Constituent of symbiosis International University
Accredited by NAAC with ‘A’ Grade
Established under Section 3 of the UGC Act, 1956, vide notification No: F.9.12/2001-U-3of the Government of India.
INTERNAL CREDIT RATING FOR LOANS BY INDIAN BANK
Internship Report submitted to SIU in partial completion of the requirement of
MBA Banking Management at Symbiosis School of Banking Management
Pune-412115.
Puneet Shekhar Nayak Mr. Shridhar Potdar Mr. Sudhir Alladwar
PRN: 07 PROJECT MENTOR (SSBM) PROJECT MENTOR AT THE BANK
APRIL 16, 2013 TO JUNE 8, 2013
2. 2
ACKNOWLEDGEMENT-
I express my sincerest gratitude and thanks to Mr. Sudhir Alladwar (ABM, Indian Bank, Kirkee Branch,
Pune) for giving his kind support in completing my 8 week internship.
Under his guidance I was able to get insights into retail banking and got to learn that what is banking
from other side of table.
I wouldalsolike tothankthe overwhelmingsupportof all the employeesof the branch who gave me an
opportunity to learn and gain knowledge about the various aspects of the industry.
I would like to thanks Mr. Shridhar Potdar (Faculty-Symbiosis School of Banking Management) for his
constant support and valuable suggestions without which this project would not been successfully
completed.
3. 3
Student profile-
Name – Puneet Shekhar Nayak
Educational qualification-
Sr.No. Degree School/ College
1 10th R.P.M.Academy
2 12th Ann Mary School
3 Graduation (B.B.A) Institute of Management studies, Dehradun
4 M.B.A Symbiosis school of Banking Management
Work experience- NIL
Internship – Indian Bank (Kirkee Branch, Pune)
Area of Internship- Retail and SME lending
4. 4
TABLE OF CONTENT
ACKNOWLEDGEMENT- 2
STUDENT PROFILE- 3
EXECUTIVE SUMMARY- 7
BANKING SECTOR IN INDIA 8
INTRODUCTION 10
BUSINESSOF INDIAN BANK 12
RETAIL AND AGRICULTURE- 12
COMMERCIAL BANKING- 12
CORPORATE BANKING- 12
SME BANKING- 13
STRATEGIESADOPTED BYINDIAN BANK 13
PRODUCTSAND SERVICESOF INDIAN BANK 14
LOAN PRODUCT/SERVICE 14
DEPOSIT PRODUCTS 18
INTRODUCTION- INTERNAL CREDIT RATING 20
FUNCTION OF CREDIT RATING- 21
ADVANTAGE OF INTERNAL CREDIT RATING 21
EXPECTATIONS OFBANK RISK RATING SYSTEM 22
CORPORATE GOVERNANCE AND OVERSIGHT- 22
METHODOLOGY USED BY BANKS FOR INTERNAL RATING 23
RISK RATING (INDIAN BANK) 24
SCOPE OF INTERNAL RATING- 25
OBLIGOR RATING- 25
FACILITY RATING- 25
5. 5
RATING GRADES/ STRUCTURE- 25
WHY BANKS DO THEIR OWN INTERNAL RATING? 29
DEVELOPMENT IN BANKS RISK RATING METHOD- 29
CREDIT SCORING- 31
INTRODUCTION 31
HOWSCORING IS DONE- 32
SME RATING MODEL- 36
RISK ASSESSMENT MODEL- RAM 36
FEATURES- 36
RATING CRITERIA: 37
FINANCIAL CONDITION 37
MANAGEMENT AND OWNERSHIP STRUCTURE 37
QUALITATIVE FACTORS: 37
OTHERS: 37
FACILITY 38
COLLATERAL 38
SAMPLE OF RAM RATING- 39
RESEARCH METHODOLOGY 27
PROBLEM STATEMENT- 27
OBJECTIVE OF STUDY- 27
RESEARCH TYPE 27
COVERAGE- 27
DATA COLLECTION- 28
SECONDARY DATA- 28
LIMITATION OF STUDY- 40
EXPECTED CONTRIBUTION OFSTUDY- 40
BIBLIOGRAPHY 41
7. 7
Executive summary-
Following the crises and deep transformations which marked the world economy after the
World War II, Basel Committee developed a Basel Agreement, published in 1988 and revised in
2004.
The major objectives of the revised agreement, called Basel II Agreement, are the same –
promotion of bank system security and soundness and increase of competitive equality of banks
This project report is focused on credit rating for SME loans and Retail loan (education
loan). This project report gives insight into the internal credit rating procedure followed by
Indian Bank to rate its retail as well as SME customers. Indian Bank follows a strict procedure to
scrutinize the details of customers before issuing loans and advances. This strict procedure has
helped bank to reduce to number of loan defaults (NPA).
8. 8
BANKING SECTOR IN INDIA
Banking System in India
Reserve bank of India (Controlling Authority)
Banks
Commercial Regional Rural Land Development Co-operative
Banks Banks Banks Banks
Public Sector Banks Private Sector Banks
SBI Groups Nationalized Banks Indian Banks Foreign Banks
10. 10
Introduction
- Founded- March, 5,1907
- Commenced Operation- August, 15, 1907
- Nationalized- July,19, 1969
- State owned financial service company
- Headquarter- Chennai, India
- First international branch- Colombo 1932
Branches-
In India- 2089
International-
o Singapore-1
o Sri-Lanka- 3
Financials -
- Total business (as on 31/3/2012)- Rs.2,11,988 crores
- Operating Profit (as on 31/03/2012) Rs.3,463.17 crores
- Net Profit (as on 31/03/2012) Rs. 1746.97 crores
History
Indian Bank (IB) is one of the oldest banks in India and its Headquarters in Chennai, The
Bank was founded by Annamalai and Ramaswami Chettiar on 15th August 1907 as part of
the Swadeshi movement. Seek to provide a comprehensive range of financial products and
services to all our customers under one roof.
11. 11
2007-
08
2008-09 2009-10 2010-11 2011-12
Number of offices 1577 1680 1792 1899 1993
Number of
employees
20548 19993 19641 19311 18782
Business per
employee
48.80 61.70 76.10 93.00 111.40
Profit per employee .49 .62 .79 .89 .93
Capital and
reserves& surplus
51605 71359 82721 95211 108014
Deposits 610459 725818 882277 1058042 1208038
Investments 219151 228006 282638 347838 379760
Advances 398387 513965 621461 752499 903236
CRAR 12.475 13.98 12.71 13.56 13.47
12. 12
BUSINESS OF INDIAN BANK
Business of Indian Bank is divided in four main areas:
i) Retail, and Agriculture
ii) Corporate
iii) Commercial financial services
iv) SMEs.
Retail and Agriculture-
Retail banking business provides financial products and services to retail
customers. It includes housing, retail trade, and other personal loans and deposit services.
It also includes distribution of products such as global debit and credit cards, third party
products such as mutual fund products, life and nonlife insurance policies, as well as
mediclaim policies.
Bank focus on addressing the needs of agricultural customers and offer
specialized products and services that cater to the agricultural and rural sectors. It
includes direct financing to farmers for production and investment, as well as indirect
financing for credit to suppliers of agricultural inputs and infrastructure development. Set
up of rural Internet Kiosk Centers in 12 locations to facilitate banking information in
rural areas.
Commercial Banking-
Indian Bank also deals in commercial banking products and services to corporate and
commercial customers (mid-sized and small businesses) and government entities. Loan
products include term loans for the construction of assets as well as short-term loans,
cash credit, and other working capital financing and bill discounting. Bank also deals in
letters of credit and guarantees.
Corporate banking-
Corporate banking products are intended to facilitate the establishment, expansion
and modernization of businesses, including the acquisition of fixed assets, plant and
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machinery and meeting working capital needs. Bank provides flexible security
requirements to such borrowers to help make credit more accessible to them.
SME Banking-
The fourth business segment is for SMEs through which bank provide financial
services to medium enterprises and SSIs. Products for this sector are intended towards
establishing, expanding and modernizing of business entity, including acquisition of fixed
assets, plant and machinery and meeting working capital needs.
STRATEGIES ADOPTED BY INDIAN BANK
1- Continue to develop technological capabilities
2- Maintain and enhance franchise in agriculture and SME sector
3- Enhance retail banking business and focus on small business
4- Build and expand rural area business
5- Strengthen and expand corporate and commercial products and services
6- Maintain high asset quality through comprehensive risk management
7- Leveraging on strong brand equity and expansive branch network
8- Attract and retain skills and experienced professionals
9- Cost control
10- Strategic alliance
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PRODUCTS AND SERVICES OF INDIAN BANK
Loan Product/Service
1- Retail
Sr. Variety of loans Brief description
1 Housing loan Long term loans to customers to finance the purchase,
construction, repair and renovation of homes and the
purchase of home sites.
2 Education loan Provide financial assistance for studies both in India and
abroad on reasonable terms to needy and meritorious
3 Vehicle loan Finance the purchase of both two wheelers and four
wheelers, including second-hand vehicles.
4 Consumer durables Loan for purchase of consumer durables and white goods,
such as TVs, air-conditioners.
5 Personal loan Loans designed particularly for the salaried classes
6 Professional loan Loans to qualified professionals, such as chartered
accountants, architects.
These loans can be used for business purposes, including the
purchase of necessary tools and equipment, the purchase of
vehicles, the upgrading of existing equipment etc.
7 Mortgage and
improvement
Financing against immovable property. This loan is available
in the form of a term loan or a secured overdraft with the
option of fixed or floating rates.
8 Loan to educational
Institutes
Loan to schools and other reputed educational institutions to
construct or upgrade buildings.
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2- Corporate Loans
Sr. Variety of Loans Brief Introduction
1 Term loan Finance the creation and improvement of assets,
including project finance.
Secured by the project assets and personal property
financed, and by other assets of the borrower
2 Cash credit / other working
capital facilities
Revolving credit facilities secured by working capital
assets, such as inventory and receivables.
overdrafts, working
Demand loans, working capital loans and bill
discounting facilities to our corporate and commercial
borrowers.
3 Letter of Credit Generally provided as part of a package of working
capital financing products or term loans.
This facility is often partially or fully secured by assets,
including cash deposits, documents of title to goods,
stocks and receivables.
4 Bank gurrantee Issue guarantees on behalf of customers to guarantee
their payment and performance obligations.
Secured by account indemnities, a counter guarantee or a
fixed or floating charge on the assets of the borrower,
including cash deposits.
5 Loan against shares/ securities It involve issue of loans to corporate houses for purchase
of shares or securities.
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1- Agricultural and priority sector loan-
Sr. Variety of loan Brief introduction
1 Kisan Credit Card (KCC) Short term production credit to farmers under the Kisan
Credit Card scheme in the form of cash credit for
providing hassle-free credit to agriculturists.
2 Sugar premium loan To enhance the flow of credit to registered cane
growers to meet their investment credit requirements
related to farm activities.
Farmers who have been supplying their
cane to reputed sugar mills for the prior three years are
eligible.
4 Agriculture produce marketing loan To provide finance against pledge of Warehouse
receipts, cold storage receipts etc.
To avoid distress in sale of agricultural and enable them
to get a remunerative price.
5 Joint Liability group (JLG) To augment flow of credit to tenant farmers cultivating
land either as oral lessees or share croppers an small
farmers who do not have proper title of their land
holding through formation and financing of JLGs.
6 Loan for purchase of pre-used tractors
for agriculture
To meet out of the needs of farmers who cannot afford
to buy a new tractor.
Farmer having minimum of 4acres of irrigated land or
8acres of dry land are eligible for this loan.
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2- Small and Medium Sized Enterprises (SME) Loans-
Sr. Variety of loans Brief introduction
1 My own Shop Loan for customers wishing to purchase commercial
space and new or second
hand shops necessary for running their business
2 IB Aayushmaan Loan loans for the construction, renovation or upgrade of
gyms or fitness center and the purchase of fitness
equipment
3 IB Shanti Niketan loans for the extension or renovation of hostels for
working women, men or students.
4 Annapoorna and Aroghya Loan loans for the establishment, expansion or
renovation of small to mid-size hotels, restaurants,
bakeries and other service oriented enterprises.
5 IB BPO finance for customers wishing to establish, renovate or
upgrade BPO centres
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Deposit products
Sr. Variety of deposit products
1 Savings account
2 Current account
3 Fixed deposits
4 Recurring deposit
5 Facility deposit (fixed plus savings account facility)
6 Re investment plan deposit
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INTRODUCTION- INTERNAL CREDIT RATING
In the area of credit risk, the Basel II framework allowed banks, for the first time, to use their
own estimates of certain risk parameters to determine the regulatory capital required for an
exposure.
The term ‘rating system’ comprises all of the methods, processes, controls, and data collection
and IT systems that support the assessment of credit risk, the assignment of internal risk ratings
and the quantification of default and loss estimates.
An assessment of the credit worthiness of individuals and corporations. It is based on the history
of borrowing and repayment, as well as the availability of assets and extent of liabilities.
Ratings typically include an assessment of the risk of loss due to the default of counterparty,
based on consideration of relevant quantitative and qualitative information.
Drawing up and using an intrinsic system of evaluating credit risk.
Internal ratings may incorporate customer information which is usually out of the reach of
external credit assessment institutions.
With help of rating process, debtors are distributed by classes, IT resources and complex
statistico-mathematical models of rating sustaining the experts’ opinions, and a methodology of
validation.
Internal ratings may be developed via empirical models (e.g., credit risk, scorecards) or expert-
based models. In addition, external ratings, as well as ratings from market-driven rating models,
are widely employed.
Internal rating tries to measure-
- Borrower’s probability to default (PD)
- Facility’s loss given default (LGD)
- Level of exposure at time of default (EAD)
- The credit’s expected loss (EL)
- The unexpected loss (UL)
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1- Borrower’s probability to default (PD)- The risk that a debtor does not comply
with the agreements related on principal and interest during one year; it gives the
average percentage of obligors that default in this rating grade in the course of one
year.
2- Facility’s loss given default (LGD) - It measures the loss, as percentage of the credit
volume.
3- Level of exposure at time of default (EAD) - The amount of the outstanding
financial capital during one year, or until maturity, in case maturity is below one year.
4- The credit expected loss (EL) - The amount the bank could lose, on an average,
given its portfolio of credits at a particular time period.
5- The Unexpected loss (UL) - The difference of the expected maximum loss on a
portfolio at a particular time period and EL.
Function of Credit Rating-
Well-managed credit risk rating systems promote bank safety and soundness by facilitating
informed decision making. Rating systems measure credit risk and differentiate individual credits
and groups of credits by the risk they face. It allows bank management and examiners to monitor
changes and trends in level of risk. It also allows bank management to manage risk to optimize
returns.
ADVANTAGE OF INTERNAL CREDIT RATING
- Internal ratings may incorporate customer information which is usually out of the reach
of external credit assessment institutions.
- Help the bank assess the level of risk.
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Expectations of Bank Risk Rating System
No single credit risk rating system is ideal for every bank. The attribute described below should
be present in all systems, but how banks combine those attributes to form a process will vary.
- This risk rating system should be integrated into the bank’s overall portfolio risk
management
- The board of directors must approve the credit risk rating system and assign clear
responsibility and accountability for the risk rating process
- The system should assign an adequate number of ratings to ensure that risks among pass
credits are adequately differentiated.
- Ratings must be accurate and timely
- The criteria for assigning rating should be clear and precisely defined using objective and
subjective factors
- Rating allotted should reflect the risks posed by both the borrower’s expected
performance and the transaction’s structure
- Banks should determine through back-testing whether the assumptions implicit in the
rating definitions are valid. If assumptions are not valid, rating definitions should be
modified.
- The rating assigned should be well supported and documented
Corporate governance and oversight-
It is the responsibility of the Board of Directors to approve an internal risk rating policy, which
should be implemented by the management. The Board should also exercise appropriate
oversight over the system in a consistent manner. Rating policy including criteria and procedures
must be periodically reviewed to determine whether it remains fully applicable to the current
portfolio and to external conditions.
Banks must have independent credit risk control functions that are responsible for the design or
selection, implementation and performance of their internal rating systems. Rating assignments
and periodic rating reviews must be completed or approved by a party that does not directly
stand to benefit from the extension of credit.
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METHODOLOGY USED BY BANKS FOR INTERNAL RATING
Banks are free to adopt any of the methodologies/techniques keeping in view their size,
complexity of operations and clientele base. The methodologies/techniques should be flexible to
accommodate present and future risk profile of the bank, the anticipated level of diversification
and sophistication in lending activities. However, whatever the method used, the result of the
evaluation should provide meaningful information which can be further used for effective credit
risk measurement and management of the credit exposure at an individual level as well as at a
portfolio level.
A number of rating techniques and methodologies have evolved over time. The methodologies
range from a spectrum of purely expert/professional judgment taking into account only
qualitative factors, to a sophisticated statistical model based methodology solely taking into
account the quantitative factors, yet neither of the two extremes is advisable.
An ideal internal risk rating system is based on both quantitative and qualitative factors
concluding the decision based on many different attributes, involving the human judgment.
The degree of usage of qualitative factors depends on the quality and frequency of the
quantitative information, the model used by the banks and the modalities of the products.
For an optimal internal rating system, the human judgment, experience and general
considerations become more important than any mathematical methodology used. The
mathematical models should be used prudently. So, a proper weight-age should be given to such
qualitative factors. Banks based on their portfolios, clientele and products, may use the
qualitative and quantitative factors with a varied degree in their different rating models.
However, the main objective should remain the same to quantify the risk of obligor in an ordinal
way.
A rating methodology may be used based on asset class/product lines, e.g. corporate
loans/consumer finance or based on line of credit, e.g. for over draft/running finance etc. Within
each asset class, a bank may utilize multiple rating methodologies. However, these methodology
adopted should be able to be integrated in overall risk management system (the ratings developed
by different methods should be comparable with each other). When multiple rating systems are
used, it is required that, the rationale for assigning a borrower to a rating system must be
documented and applied in a manner that best reflects the level of risk of the borrower.
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The ultimate objective of internal rating system should be to generate accurate and
consistent risk ratings. This process must provide for a meaningful differentiation of risk,
grouping of satisfactory exposures, and must allow for accurate and consistent estimation of loss
characteristics at pool level.
The internal risk rating system should be integrated with other systems of the banks such
as portfolio monitoring, loss reserves analysis for provisioning, internal capital planning and
return on capital analysis. Banks should use same rating systems for lending purposes, risk
analysis and capital allocation.
Risk rating (Indian Bank)
Taking into account the RBI’s guidelines on credit risk management, Indian Bank established
seven internal rating models for different segments and use the Moody's Rating model for
borrowal accounts with credit limits of Rs. 10 million and above in the manufacturing segment.
Indian Bank adopted credit risk ratings in 9- point scale in their internal models and 7 grades of
rating under the Moody's risk rating model. Standard borrowal accounts with exposure of Rs.
200,000 and above are brought under the purview of rating exercise. Exposures below Rs.
200,000 and specific segments, such as Loan on Deposits, Jewel Loan and Agriculture credit are
rated under portfolio approach.
Internal rating is done separately for Retail customers (credit scoring) and Small and big
corporates (risk rating).
Credit scoring is most often used in the retail banking segment, while the term “risk rating” is
used in wholesale banking units to define the same process of producing risk ratings for
counterparties.
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Scope of internal rating-
All banks are required to assign internal risk ratings across all their credit activities including
consumer portfolio. The internal risk ratings should be based on a two tier rating system.
Obligor rating- This rating is based on the risk of borrower default and representing
the probability of default by a borrower or group in repaying its obligation in the normal course
of business and that can be easily mapped to a default probability bucket.
Facility rating- It into account transaction specific factors, and determine the loss
parameters in case of default and representing loss severity of principal and/or interest on any
business credit facility. This rating is oriented to the loss severity of principal and/or interest on
any exposure.
Rating grades/ Structure-
The appropriate number of credit risk grades is an important feature of any internal risk rating
system. The number of grades assigned should be such that a bank has a meaningful distribution
of exposures across grades, on both its borrower-rating and its facility-rating scales.
For obligor ratings, the banks should have at least nine credit risk grades for non-defaulted
borrowers and three for defaulted borrowers.
Rating grades Introduction
1 Credit exposure is of the highest quality and has minimum credit risk.
This rating should be assigned only when the creditor’s capacity and willingness to
meet its financial obligations in time is extremely strong and is unlikely to be
adversely affected by the economic or foreseeable events.
2 Very good quality creditors that are lower than grade 1 in only small degree and
denotes somewhat larger credit risk than grade 1 creditors.
The obligor’s capacity to meet the financial commitment on the obligation is very
26. 26
strong and is not significantly vulnerable to foreseeable events.
3 Good quality creditors, whose capacity to meet their financial commitment to the
obligation is still strong, however there are elements present, however minor, which
may suggest a susceptibility to impairment in the future.
This category is more susceptible to adverse effects of changes in circumstances and
economic conditions than obligations in higher rated categories.
4 medium quality obligor and bears average security and certainty of timely fulfillment
of financial obligations
5 Assigned to the lower medium quality obligor, whose future cannot be considered as
well assured. Such customers bear high risk associated
with their capability or willingness to fulfill their financial obligations
6 This rating is given to poor quality creditors.
Fulfillment of financial obligations over any longer period of time may be uncertain.
7 Obligors graded 7 are of poor standing and there may be elements of danger with
respect to fulfillment of their financial obligations.
They are currently vulnerable to nonpayment, and their capability to meet financial
obligations is dependent upon favorable business, financial, and economic conditions.
8 The capacity of the obligor to meet its financial commitments is currently highly
vulnerable and at any time may discontinue its payments.
9 Obligor bears the highest default risk exposure and is virtually in default but payments
on the obligations are still continued.
Even the positive development of the business, financial and economic conditions
need not mean its capability to meet its financial obligations.
10 denotes substandard loans as defined by SBP from time to time
11 denotes doubtful loans as defined by SBP from time to time
12 denotes loss category as defined by SBP from time to time.
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RESEARCH METHODOLOGY
Credit rating- An assessment of the credit worthiness of individuals and corporations. It is based
upon the history of borrowing and repayment, as well as the availability of assets and extent of
liabilities.
Ratings typically embody an assessment of the risk of loss due to the default of counterparty,
based on consideration of relevant quantitative and qualitative information.
Drawing up and using an intrinsic system of evaluating credit risk.
Problem statement-
To study internal credit rating process implemented in Indian Bank
Objective of study-
- What is internal rating
- Why is internal rating done in banks
- Factors considered for Internal Rating/ Scoring
- Advantages of internal rating
- Rating for retail and SME loans
RESEARCH TYPE: Exploratory
Coverage-
The research was conducted at branch level. (Indian Bank, Kirkee branch, Pune)
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Data collection-
Secondary Data-
The data/ information which is collected is secondary in nature as all the information needed was
system based or was as per the guidelines of Bank.
- Books,
- Bank circulars,
- RBI guidelines on Internal rating of loan
- Bank’s official website
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Why banks do their own internal rating?
- Differing views on the appropriate degree of reliance on quantitative (i.e., measurable) as
opposed to qualitative (i.e., difficult to measure) risk factors;
- The importance of each institution’s individual credit culture and historical experience, in
light of the close connection between rating systems and credit risk management
processes more broadly;
- Differing judgments regarding the complexity and opaqueness of the risks associated
with each transaction;
- Differing responses to the inherent difficulties associated with quantifying loss
characteristics, and
DEVELOPMENT IN BANKS RISK RATING METHOD-
Development of robust internal risk rating processes to increase the precision and effectiveness
of credit risk measurement and management. Banks tries to implement advanced portfolio risk
management practices and improve their processes for measuring and allocating economic
capital to credit risk. Further, expanded risk rating system requirements are anticipated for banks
that assign regulatory capital for credit risk in accordance with the Basel Committee on Bank
Supervision’s proposed internal-ratings-based approach to capital.
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Credit scoring-
Introduction
Credit scoring is used in the retail segment, and has been for several decades in the more
mature banking markets. Typically, this segment comprises a large number of customers with
similar characteristics or product requirements. The availability of large amounts of internal and
external (i.e., credit bureau) data enables the development of scorecards using predictive
modeling techniques. Several statistical methods may be used, with logistic regression being the
most popular. A credit score is based upon information drawn from an individual’s credit report.
Scoring is done in following cases
- Application scoring for new customers or for customers requesting a certain product for
the first time.
- Behavioral scoring for customers who already have a credit history with the institution.
The score can be used in various credit risk management contexts. Application scoring is
relevant for the following types of decisions:
Risk-based pricing/
Down payment/
Deposit.
Loan limit.
Cross-sell/up-sell offers.
Product upgrade/downgrade.
Due diligence optimization
ATM limits
Payment terms.
Regulatory/economic capital.
The credit score is linked to a probability of default, which can then be used for portfolio
modeling, pricing and capital allocation purposes.
Generally, the scoring process itself is fully automated, which makes it inexpensive. For the most
part, scorecards are easy to understand, and scoring outputs are easily interpreted.
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How scoring is done-
These days credit scoring is totally software based system.
Details about the customers are entered into system and score card is generated by system.
For further clarification a sample of the data entry portal and score card is attached.
33. 33
Branch : ******* ---- SPECIMEN OF SCORE CARD----- CBS Code : *****
SCORING REPORT - Home Loan
Reference No : ******* Branch Code : *******
Mr. XYZ Circle : PUNE
Address- Branch : ******
Status : Fresh
Detailed Scoring Information
Sl
No
Parameter Value Score Max Score
1 Capacity To Repay 1.01 15 30
2 LTV Ratio 0.77 10 20
3 Life Style Index 1.25 4 10
4 Networth to Loan Ratio 1.84 5 5
5 Occupation M N C 3 3
6 Qualification PG and Doctorate 3 3
7 Stability Of Income Steady increase - last 3 years 2 2
8 Age of Borrower 31 2 3
9 Designation Executive 2 2
10 Location Movement No Change 2 2
11 Relationship with our Bank No existing relation 0 3
12 Marital Status Married 2 2
13 Marketability Of Property Very Good 3 3
14 Purpose Of Loan
Construcion/Takeover/Purchase
of new flat or house
3 3
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15 Mode of Repayment Deduction at Source 3 3
16 Proof Of Income Salary Slip 2 3
17 Repayment Tenor Above 20 years 0 3
TOTAL SCORE 61
MAXIMUM SCORE 100
Signature RATING BBB
36. 36
SME RATING MODEL-
Software driven rating / scoring models (Risk Assessment Model – RAM) for different
segments are in place since 1st April, 2008.
Risk assessment model- RAM
RAM is a internal rating software designed to assist a bank in complying with the requirements
under the internal ratings-based approach of the Basel II. RAM helps in credit risk appraisal of a
borrower through a judicious mix of objective and subjective methodologies and acts as a
comprehensive database for all borrower-specific information.
RAM is widely used as internal risk rating solution in India.
Features-
Standardization and automation, ensuring a robust rating process
Two-dimensional rating approach (Borrower & Facility Rating)
Estimation of probability of default
Capturing relevant default, loss and recovery data for Loss given Default (LGD) and
Exposure at Default (EAD) estimation
Ability to host multiple models, including bank's existing rating models
Loan Origination System
Credit Administration
37. 37
Rating criteria:
To ensure that banks are consistently taking into account available information, they must
use all relevant and material information in assigning ratings to borrowers and facilities. They
must take into consideration the maximum available attributes of an obligor; financial as well as
managerial, quantitative as well as qualitative. They should also make optimal use of market
generated information.
In order to assign obligor ratings the banks are required to consider, but not limited to, the
following aspects of the borrower:
Financial Condition
- Economic and financial situation
- Leverage
- Profitability
- Cash flows
Management and ownership structure
- Ownership structure
- Management and quality of internal controls
- Assessment of the willingness to pay
- Strength of Sponsors
Qualitative factors:
- CIBIL report
- Sector of business
- Industry property and its future prospects
Others:
- Country risk
- Comparison to external ratings.
- Credit information from other sources
In order to assign the ratings, the bank should take in consideraton the relevant and material
information including-
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Facility
- Nature and purpose of loan
- Loan structure
- Product type
- Rights in case of bankruptcy
- Degree of collateralization
- Composition of collateral
Collateral
- Nature
- Quality
- Liquidity
- Market value
- Exposure of the collateral to different risks
- Quality of the charge
- Legal status of rights
- Legal enforceability
- Time required to dispose off
In the case of credits to individuals, factors such as personal income, debt burden should also
be considered. Although the qualitative factors are not sometimes measurable, however, the
persons analyzing these aspects should be careful and conservative in their approach.
Banks should be vigilant about the quality and reliability of the data. Given the difficulty in
forecasting future events and the influence they will have on a particular borrower’s financial
condition. Bank must take a conservative view of projected information.
40. 40
Limitation of Study-
- Time constraint- only 8 week is not enough to understand process on internal credit rating
for loans.
- Access to data- due to privacy policy of Bank, the access to data was limited. I tried to do
the best with the available data.
Expected contribution of study-
- Understanding of retail and SME customer rating
- Understanding of issue of loans to SME and retail
- Life time experience
- Got a chance to experience banking from other side of table,
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CONCLUSION
BASEL II framework allowed banks to use their own estimates of certain risk parameters
to determine the regulatory capital required for an exposure.
Banks are free to adopt any of techniques to carry out the rating procedures, depending
on their own risk bearing capacity.
Internal credit rating by banks helped them in various ways-
- It allows bank management and examiners to monitor changes and trends in level of risk.
- Measures Credit risk
- Grading and scoring of customers
- It also allows bank management to manage risk to optimize returns.
- Promotes banks safety and soundness
- Helps n managing risk to optimize returns
- Proper assessment of loans,
- Bank need not to depend on other rating agencies for loans,
- Assessment of interest rates to be charged to different customer based on their rating,
The ultimate objective of internal rating system should be to generate accurate and consistent
risk ratings.
CIBIL plays a very important role in internal rating by banks by providing the credit history
of the customer.
Credit rating/ scoring is done using various parameters such as personal, management, financial
etc. to evaluate credit worthiness of the borrower.
