The document discusses credit risk management in banks using Punjab National Bank as a case study. It outlines PNB's risk rating model called PNB TRAC which rates borrowers on a scale of PNB-D to PNB-AAA based on scores from management, business, and financial evaluations. As an example, it provides the risk rating report of an entrepreneur's new business which was given an overall rating of PNB-A based on its scores in various evaluation parameters.

1. Credit risk management in Banks – A case study
Basel Accord has classified risks in to three categories – Credit risk, Market risk and
Operational risk. Of the three the most prominent risk is credit risk constituting 90-95%
of risk segment of Banks. RBI has approved Standardized approach for credit risk
measurement whereby a borrower is to be rated by approved credit rating agency for
taking lending decisions. Punjab National Bank has developed an assessment model for
the purpose of risk ratings of its borrowers known as PNB TRAC. It has categorized its
borrowers as Large corporate borrowers, mid corporate borrowers, small loans, NBFC,
New project rating models and Entrepreneur new Business model for rating purpose and
has the rating scales starting from PNB- D to PNB – AAA as follows
Score obtained Rating Description
Above 80 AAA Minimum risk
77.50-80.00 AA+ Marginal risk
72.50-77.50 AA
70.00-72.50 AA-
67.50-70.00 A+ Modest Risk
62.50-67.50 A
60.00-62.50 A-
57.50-60.00 BB+ Average Risk
52.50-57.50 BB
50.00-52.50 BB-
47.50-50.00 B+ Marginally
acceptable risk
42.50-47.50 B
40.00-42.50 B-
30.00-40.00 C High Risk
30.00 & below D Caution
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2. Case
For the purpose of illustrating the rating procedure by using PNB TRAC Entrepreneur
new business model is selected. Borrower is a Private Ltd company locally providing It
services. PNB TRAC’s evaluation criteria includes Management evaluation, Business
evaluation, Financial evaluation – Both objective and subjective and also key risk factor.
The evaluation is reported as follows
Credit Risk Rating Report For Entrepreneur New Business Model
1. Name of the Borrower:
2. Address
3. Constitution
4. Industry
5. Activity
6. Balance sheet as on date
7. Borrower Code
8. Rating Id
9. Exposure
10. Draft No:1
I) Sanctioned limits
II) Proposed Limits
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3. Management evaluation (Score 0-4)
Parameters Comment Rate
Managerial capabilities Capable of efficient management 2.00
Commitment & sincerity Sincere and Trust worthy 3.00
Financial flexibility/ family
Group support Family Support 3.00
Track record in Debt
Repayment N.A
Relationship with Bank Good relation Maintained so far 3.00
Business Evaluation – Service sector (Score 0-4)
Parameters Comments Rate
Location of unit Near to branch in the city 3.00
Marketing service Easily marketable 2.50
Core competency One promoter is highly qualified
In the field 2.50
Infrastructure Available Necessary infrastructure now made
Available 3.00
Quality Good quality of service maintained 2.50
Others NA
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4. Financial Evaluation – Objective
Co’s
parameters 0-1 1-2 2-3 3-4 4 Rate
value
TOL: 5.00- 4.50- 3.25- 1.75-
1.34 <=1.00 3.55
TNW 4.50 3.25 1.75 1.00
Current 1.00- 1.15- 1.35- 1.75-
3.87 >=2.00 4.00
ratio 1.15 1.35 1.75 2.00
ROCE% 14.29% 4-7% 7-10% 10-13% 13-16% >=16% 3.43
Inventory
&Drs
0.00 5-4.50 4.50-4 4-3 3-2 <=2 4.00
holding in
months
Repayment
5.00 6-5.5 5.5-5 5-4 4-3 <=3 2.00
period
DSCR 1.25- 1.50- 1.75- 2.25-
2.17 >=2.50 2.84
(Avg) 1.50 1.75 2.25 2.50
Financial Evaluation – subjective
Parameters Comments Rate
Reliability of data submitted/ Reasonably reliable 2.50
Reputation of appraiser /
Impairment in value of assets
Conduct of A/C NA
Total Score
Sl.no Parameters Max.score Score Weight Weighted
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5. obtained Score
1 Management 100 68.00 40 27.20
2. Business 100 67.50 35 23.63
3. Financial 100 70.42 25 17.61
Credit Risk Rating (Maximum Ceiling on Total Score is applied) PNB –A 65
Source: PNB Branch Data
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