development of credit model as a part of my internship project in my MBA course. It covers all the types of risk like business, industry , management and financial risk. It gives detailed calculation of all these in the excel format.
2. • A Non-Banking Financial Company (NBFC) is a
company registered under the Companies Act, 1956
engaged in the business of
• loans and advances,
• acquisition of
shares/stocks/bonds/debentures/securities
issued by Government or local authority or other
marketable securities of a like nature,
• leasing,
• hire-purchase,
• insurance business, chit business etc..
WHAT IS NBFC?
3. BANK AND NBFC
NBFCs lend and make investments and hence
their activities are akin to that of banks;
however there are a few differences as given
below:
• NBFC cannot do basic banking
activities like deposits, demand
deposits etc.
• NBFCs do not form part of the
payment and settlement system and
cannot issue cheques drawn on itself;
• Credit Guarantee Corporation is not
available to depositors of NBFCs,
unlike in case of banks.
• NBFCs don’t want to maintain any
reserve ratio
5. CREDIT RATING
MODEL
• The Internal rating based
approach relies on a bank's own
assessment of its counterparties
and exposures to calculate
capital requirements for credit
risk.
• The Basel Committee on Banking
Supervision explained the
rationale for adopting this
approach.
6. CREDIT RATING MODEL
Bank must take two major steps:
• Categorize their exposures into various asset classes as defined by the Basel III accord
• Estimate the risk parameters—probability of default (PD), loss given default (LGD),
exposure at default (EAD), maturity (M)—that are inputs to risk-weight functions
designed for each asset class to arrive at the total risk weighted assets (RWA)
7. CREDIT RATING
SYSTEM DESIGN
A rating system must be designed based on
two dimensions
• Borrower characteristics indicating the
propensity of the borrower to default
• Transaction specific factors like the
nature of the product, terms of
repayment, collateral, etc.
• A rating system typically assigns a borrower
to a particular grade based on their
probability of default.
8. OBJECTIVE OF THE STUDY
• The objective of developing a rating model is
to remove limitations associated with a
simplistic broad classification of loan in to
good or bad category. It classifies the
counter party in to wider spectrum of low,
normal, moderate and high risk.
• To measure and quantify the various risk
categories such as Business risk, Industry risk,
Management risk and Financial risk.
• To obtain standardize and uniform way to
communicate the judgement in credit
selection procedures across the credit
portfolio.
11. OBLIGOR RATING
• Obligor rating means borrower rating.
• This rating is intended to assist banks in estimating
the Probability of Default (PD) of loans along with
pricing and credit decision at the time of their
sanction or commitment to sanction.
• The PD is used to quantify the probability of
default on obligation, of a borrower, during a
stipulated period
13. FINANCE RISK
• Finance risk of assessed based on
• Accounting quality
• Past financials
• Financial flexibility
• Cash flow adequacy.
14. FINANCIAL RATIOS
USED IN NBFCS
• Current ratio
• Total Outside Liabilities /
Tangible Net Worth
• Net profit margin ratio
• Debt /Equity
• Debt Service Coverage Ratio
• Interest Service Coverage Ratio
15.
16.
17. BUSINESS RISK
• Business risk of a borrower is
assessed by the following risk
parameters
• Market position
• Operating efficiency
• Growth
21. MANAGEMENT RISK
The management risk is assessed
by
• experience in the industry,
• leadership competency,
• ability to meet the net sales
projection,
• ability to meet the profit
projections,
• payment record to the same
bank and others and so on.
25. FACILITY RATING
Facility rating is done for the
security or facility provided by the
borrower. It is assessed based on
main parameters
• Facility characteristics
• Security characteristics
26. FACILITY CHARACTERISTICS
The facility characteristics are determined by using two parameters namely
• nature of commitment and
• tenor of the facility.
27. SECURITY CHARACTERISTICS
• Effective security level
• Nature of charge
• Enforcement of collateral
• Average rate of depreciation
• Average percentage of insurance of the collateral
• Location of collateral
• Composition of security
28.
29.
30.
31. COMPOSITE
RATING
ď‚· The profile with the overall obligor rating of AB-AAA irrespective of the facility rating the
composite rating would be C-AAA.
ď‚· For AB-AA to AB- BB Obligor ratings with facility rating of FR1 & FR2 the composite rating
would increase a notch i.e. to C-AAA, C-AA, C-A, C-BBB respectively and for rest of the facility
rating namely, FR3 to FR8 the composite rating will be same as the obligor rating i.e. C-AA, C-A,
C-BBB, C-BB respectively. (Note Only for Obligor rating AB-BB with the facility rating of FR8
the composite rating would be reduced by one notch i.e. C-B)
ď‚· For AB-B obligor rating with facility rating FR1 the composite rating would be increased to one
notch -C-BB and for facility ratings FR2 to FR6 the composite rating would be C-B.
ď‚· For AB-B obligor rating with facility rating FR7 & FR8 the composite rating would decrease by
one notch i.e. C-C
ď‚· For obligor rating with AB-C irrespective of the facility rating the composite rating would be C-C
32.
33. CREDIT RATING DONE FOR…….
• M/s A K Capital Services Limited
• M/s Asirvad Microfinance Limited
• M/s Darashaw and company private limited
• M/s Fullerton India Credit company limited
• M/s Manappuram Finance Limited
• M/s Religare Finvest Limited
• M/s E C L Finance Limited
• M/s IL & FS Financial services Limited
• M/s Kotak Mahindra prime Limited
• M/s Muthoot Finance Limited