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What is Risk Rating

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What is Risk Rating

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    1. What is Risk Rating? February 11, 2009 10:00 to 11:00

    2. What is Risk? Means danger, a peril, an uncertainty, a threat, a probability. Is the adverse effect on profitability of distinct sources of uncertainty.

    3. 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.

    4. 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!

    5. 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

    6. 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.

    7. 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.

    8. 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.

    9. 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

    10. 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

    11. 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

    12. 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

    13. 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

    14. 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

    15. 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 5 90 days < AR < 180 days 3 AR > 180 days 0 5 Maximum Points/Sub-total 50 Maximum Points/Total Score 100

    16. SB BRR Maximum Points/Total Score 100 Bonus Point for BIR FS-Based Evaluation 3 Final Score

    17. Conversion Table

    18. Thank you!

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